Our company received a request for a special order of 9,500 units of our mailboxes for $46.80 each. The normal selling price of the mailbox is $49.00 each, but the mailboxes would need to be modified slightly for the customer. The normal unit product cost of mailboxes is calculated as follows:
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Direct materials
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$16.70
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Direct labor
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$6.50
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Variable manufacturing overhead
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$3.20
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Fixed manufacturing overhead
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$6.10
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Total cost
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$32.50
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The special order would have no effect on the company's total fixed manufacturing overhead costs. Direct labor is a variable cost. Our customer would like some modifications made to the mailbox that would increase the variable costs by $6.50 per share and that would require a one-time investment of $40,000 in special equipment that would have no salvage value. This special order has no effect on our other product sales. We have plenty of spare capacity for manufacturing the special order and our company president would really like to accept the opportunity.
Required:
What is the effect on the company's net operating income of accepting the special order? Should we accept the order?