Question

4. Woodson Corporation provided the following information regarding its only product: Sale price per unit $65.00 Direct materials used $160,000 Direct labor incurred $185,000 Variable manufacturing overhead $120,000 Variable selling and administrative expenses $70,000 Fixed manufacturing overhead $65,000 Fixed selling and administrative expenses $12,000 Units produced and sold 10,000 Assume no beginning inventory Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 1,200 units at a sale price of $60 per product assuming additional fixed manufacturing overhead costs of $5,000 is incurred? (NOTE: Assume regular sales are not affected by the special order.)
A. Increase by $72,000

B. Decrease by $2,800

C. Increase by $7,800

D. Increase by $2,800

Answer 1

Answer:

B. Decrease by $2,800

Explanation:

Direct labor incurred $185,000  for 10,000 units, then it is $18.5 per unit

Direct materials used $160,000 for 10,000 units, then it is $16 per unit

Variable manufacturing overhead $120,000 for 10,000 units, then it is $12 per unit

Variable selling and administrative expenses $70,000 for 10,000 units, then it is $7 per unit

Additional revenue from accepting a special order is $72,000 = 1,200 units x sale price of $60

Additional fixed manufacturing overhead costs is $5,000

Additional variable cost $64,200 = 1,200 units x ($18.5+$16+$7+$12)

So net operating loss from special order is $2,800 = additional revenue of $72,000 – additional fixed cost of $5,000 - Additional variable cost of $64,000