1. Eley Corporation produces a single product. The cost of producing and selling a single unit of
this product at the company's normal activity level of 60,000 units per month is as follows:
An order has been received from an overseas customer for 4,000 units to be delivered this month
at a special discounted price. This order would have no effect on the company's normal sales
and would not change the total amount of the company's fixed costs. The variable selling and
administrative expense would be $3.20 less per unit on this order than on normal sales.
Suppose there is ample idle capacity to produce the units required by the overseas customer and
the special discounted price on the special order is $96.40 per unit. By how much would this
special order increase (decrease) the company's net operating income for the month?
$(102,000)
$26,800
$112,000
$(98,000)
Eley Corporation produces a single product. The cost of producing and selling a single unit of
this product at the company's normal activity level of 60,000 units per month is as follows:
Solution
Statement of Benefit from the special order:
Thus, the company net operating income will increase by $112000 by acceptance of special
order.
Note: The fixed overhead cost is not relevant here because there is ample idle capacity to
produce the units required by the overseas customer.
$
Direct Material 52.60

2. Direct Labour 10.10
Variable Manufacturing Overhead 3.10
Variable Selling Overhead 2.60
Total Relevant Cost 68.4
Selling Price 96.4
Margin per unit 28
No. of units 4000 units
Operating Margin on new units 112000