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 = $10 500 = $5,000
Thus operating income will increase by this amount.
Increase in operating income by $5,000
