Job costing - Accepting orders.
The Melville Company produces a single product called a Pong. Melville has the capacity to produce 60,000 Pongs each year. If Melville produces at capacity, the per unit costs to produce and sell one Pong are as follows:
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Direct materials
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$15
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Direct labor
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12
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Variable manufacturing overhead
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8
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Fixed manufacturing overhead
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9
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Variable selling expense
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8
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Fixed selling expense
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3
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The regular selling price for one Pong is $80. A special order has been received by Melville from Mowen Company to purchase 6,000 Pongs next year. If this special order is accepted, the variable selling expense will be reduced by 75%. However, Melville will have to purchase a specialized machine to engrave the Mowen name on each Pong in the special order. This machine will cost $9,000 and it will have no use after the special order is filled. The total fixed manufacturing overhead and selling expenses would be unaffected by this special order.
Assume Melville anticipates selling only 50,000 units of Pong to regular customers next year. If Mowen Company offers to buy the special order units at $65 per unit, the effect of accepting the special order on Melville's operating income for next year should be a:
Choose one answer.
A. $60,000 increase.
B. $90,000 decrease.
C. $159,000 increase.
D. $36,000 increase.