Question

Widget Inc. manufactures widgets. The company has the capacity to produce​ 100,000 widgets per​ year, but it currently produces and sells​ 75,000 widgets per year. The following information relates to current​ production: Sales price per unit $ 40 Variable costs per​ unit: Manufacturing $ 23 Marketing and administrative $ 8 Total fixed​ costs: Manufacturing $ 76 comma 000 Marketing and administrative $ 24 comma 000 If a special sales order is accepted for 6 comma 900 widgets at a price of $ 40 per​ unit, and fixed costs remain​ unchanged, how would operating income be​ affected? (NOTE: Assume regular sales are not affected by the special​ order.)

Answer 1

Answer:

$62,100

Explanation:

Given that,

Sales price per unit = $ 40

Variable costs per​ unit:

Manufacturing = $ 23

Marketing and administrative = $ 8

Total fixed​ costs:

Manufacturing = $ 76,000  

Marketing and administrative = $24,000

Total incremental costs:

= Variable manufacturing + Variable marketing and administrative

= (6,900 × $23) + (6,900 × $8)

= $158,700 + $55,200

= $213,900

Incremental income:

= Incremental revenue - Total incremental costs

= (6,900 × $40) - $213,900

= $276,000 - $213,900

= $62,100

Therefore, the operating income increases by $62,100.