North Pole Company produces a kind of artificial Christmas tree. Per unit costs to produce and sell one unit of Christmas tree are as follows: Direct materials $20 Direct labor $17 Variable manufacturing overhead $13 Fixed manufacturing overhead $24 Variable selling expense $12 Fixed selling expense $8 The regular selling price of one unit of Christmas tree is $100. A special order has been received by North Pole to purchase 7,000 units of Christmas tree at $90 per unit. The special order will reduce the variable selling expense by 75%. Total fixed manufacturing overhead and fixed selling expenses would be unaffected except that North Pole will need to purchase a specialized machine to make a unique tree topper on each unit of tree in the special order. The machine will cost $10,500 and will have no use after the special order is filled. Calculate the effect of accepting the special order on its operating income.

North Pole Company

Special Order:

The effect of accepting the special order on the operating income is:

Net income will increase by $248,500.

Explanation:

a) Data and Calculations:

Per unit costs and selling price:

                                                    Normal     Special Order

Regular selling price =                  $100            $90

Direct materials                              $20            $20

Direct labor                                      $17               17

Variable manufacturing overhead $13               13

Fixed manufacturing overhead    $24                0

Variable selling expense               $12                3

Fixed selling expense                    $8                 0

Cost of special machine ($10,500/7,000)          1.50

Total relevant cost                                         $54.50

Net income per unit                                      $35.50

Variable selling expense reduced by 75% = $12 * (100 -75%) = $3

Net income will increase by $35.50 * 7,000 = $248,500