The Melrose Corporation Produces a Single Product, Product C

Multiple Choice

The Melrose Corporation produces a single product, Product C. Melrose has the capacity to produce 70,000 units of Product C each year. If Melrose produces at capacity, the per unit costs to produce and sell one unit of Product C are as follows:

The regular selling price of one unit of Product C is $100. A special order has been received by Melrose from Moore Corporation to purchase 7,000 units of Product C during the upcoming year. If this special order is accepted, the variable selling expense will be reduced by 75%. Total fixed manufacturing overhead and fixed selling expenses would be unaffected except that Melrose will need to purchase a specialized machine to engrave the Moore name on each unit of product C in the special order. The machine will cost $10,500 and will have no use after the special order is filled. Assume that direct labor is a variable cost.
-Suppose Melrose can sell 68,000 units of Product C to regular customers next year. If Moore Corporation offers to buy the special order units at $90 per unit, the effect of accepting the special order for 7,000 units on Melrose's net operating income for next year will be a:

A) $79,500 increase
B) $104,000 increase
C) $114,500 increase
D) $294,000 increase