Question

Our company manufactures and sells calculators for $90 each. A major University has offered us $70 per calculator for a one-time order of 500 calculators.Our costs to manufacture a calculator include:direct materials, $25 per unit;direct labor, $20 per unit;variable factory overhead, $15 per unit; andfixed manufacturing overhead, $12 per unit.Assume that we have excess capacity and the special order will not affect regular sales.What is the change in operating income that would result from accepting this special sales order

Answer 1

Answer:

Increase in operating income by $5,000

Explanation:

Firstly, we shall compute the additional cost of this order,

Variable Cost = Direct material + Direct Labor + Variable factory overhead

= $25 + $20 + $15 = $60

Note: Fixed cost will not form part of this decision, as the company has additional capacity lying idle, thus no additional fixed cost will be incurred, and the fixed cost allocated i.e. $12 per unit is not relevant, as is just allocation and not incurred, it is a kind of sunk cost allocated.

Relevant cost = $60 per unit

Selling price per unit = $70 per unit

Contribution to profit = $70 - $60 = $10 per unit

Total increase in operating income = $10 $\times$ 500 = $5,000

Thus operating income will increase by this amount.

Increase in operating income by $5,000