Question

The Cozy Company manufactures slippers and sells them at $ 10 a pair. Variable manufacturing cost is $ 5.75 a​ pair, and allocated fixed manufacturing cost is $ 1.75 a pair. It has enough idle capacity available to accept a​ one-time-only special order of 25 comma 000 pairs of slippers at $ 7.50 a pair. Cozy will not incur any marketing costs as a result of the special order. What would the effect on operating income be if the special order could be accepted without affecting normal​ sales: (a)​ $0, (b) $ 43 comma 750 ​increase, (c) $ 143 comma 750 ​increase, or​ (d) $ 187 comma 500 ​increase? Show your calculations.

Answer 1

Answer:

(b) $ 43 comma 750 ​increase

Explanation:

Consider the Incremental Costs and Revenues arising from accepting the Special Order.

Note: Cozy Company has  enough idle capacity available to accept a​ one-time-only special order, therefore the fixed costs are irrelevant for this decision, since order is accepted within the normal operating capacity.

Sales (25,000×$ 7.50)                                  $187,500

Variable manufacturing (25,000× $ 5.75)  ($143,750)

Net Income/(loss)                                           $43,750

Conclusion

Therefore, Operating Income would increase by $43,750 as a result of Accepting the Special Order.

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