Reference no: EM132612180

Trumpy Industries Inc. (Trumpy) is considering a special order from Mike Penniless Inc. (MPI) for 10 trailers. MPI wants to raffle of the trailers to encourage clients to purchase the property inside the park for long-term contracts.

The normal selling price of these trailers are $18,995.00 and its unit product cost is $13,995, as shown:

Materials                                          $8,840.00

Direct Labour                                    $4,500.00

Manufacturing Overhead                      $ 655.00

Unit Product Cost                             $13,955.00

The manufacturing overhead is largely fixed and unaffected by variations in how many trailers are produced in any given period. However, $140 of the overhead is variable with respect to the number of trailers manufactured. MPI also wants the trailers to have a special signature plate on each of the trailers. This would require additional materials costing $200 per trailer and would also require acquisition of a special tool costing $2,500 that would have no other use once the special order was completed. This order would have no effect on the company's regular sales, and the order could be fulfilled using the company's existing capacity without affecting any other order.

Required:

Question 1. What effect would be accepting this order have on the company's net operating income if a special price of $16,995 is offered per trailer for this order?

Question 2. Should the special order be accepted at this price and what other considerations should be taken into consideration?