Question

Tom Industries has a plant capacity of​ 70,000 units and current production is​ 55,000 units. At this production volume the variable cost per unit is​ $30, and the fixed cost per unit is​ $4.10 per unit. The normal selling price of​ Tom's product is​ $45 per unit. Tom Industries has been asked by​ Sadie, Inc., to fill a special order for​ 10,000 units of the product at a special sales price of​$25 each. ​ Sadie, Inc. will market the units in a foreign country under its own brand​ name; the special order is not expected to have any effect on​ Tom's regular sales.
1)  What impact will accepting the special order have on​ Tom's operating​ income?

A. Accepting the special order will not impact​ Tom's operating income.

B. Accepting the special order will increase​ Tom's operating income.

C. Accepting the special order will decrease​ Tom's operating income.

2) By how much will operating income change if the special order is​ accepted?

Answer 1

Answer:

Accepting the special order will reduce Toms operating income by $50,000

Explanation:

See attached file

Answer 2

Answer:

C. Accepting the special order will decrease​ Tom's operating income.

Decrease by $50,000.

Explanation:

The operating income for the regular 55,000 units is:

$I_1=55,000*(\ 45-\ 30-\ 4.10)\\I_1=\ 599,500$

The total fixed cost of production is given by:

$FC = \ 4.10*55,000\\FC=\ 225,500$

Assuming that the variable cost per unit remains the same for the additional order, the income if Tom Industries accepts the special order is:

$I_2 = 55,000*\ 45+10,000*\ 25-\ 225,500-65,000*\ 30\\I_2=\ 549,500$

Therefore, accepting the special order will decrease Tom's operating income.

The change in operating income is:

$\Delta I=I_2-I_1\\\Delta I = \ 549,500-\ 599,500\\\Delta I =-\ 50,000$

Operating income will decrease by $50,000.