Question

The regular selling price for the product is $80. The annual quantity of units produced and sold is 40,000 units (the costs above relate to the 40,000 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory. What would be the effect on operating income of accepting a special order for 1,000 units at a sale price of $40 per product

Answer 1

Answer:

The correct option is d. Increase by $19,500.

Explanation:

Note: This question is not complete. The complete question is therefore provided before answering the question as follows:

Pluto Incorporated provided the following information regarding its single product:

Direct materials used = $240,000

Direct labor incurred = $420,000

Variable manufacturing overhead = $160,000

Fixed manufacturing overhead = $100,000

Variable selling and administrative expenses = $60,000

Fixed selling and administrative expenses = $20,000

The regular selling price for the product is $80. The annual quantity of units produced and sold is 40,000 units (the costs above relate to the 40,000 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory.

What would be the effect on operating income of accepting a special order for 1,000 units at a sale price of $40 per product? Note: The special order units would not require any variable selling and administrative expenses.

a. Decrease by $19,500

b. Decrease by $18,000

c. Increase by $18,000

d. Increase by $19,500

The explanation of the answer is now provided as follows:

We first calculate the expected total relevant cost of the special order as follows:

Direct materials cost per unit = Direct materials used / Annual units = $240,000 / 40,000 = $6.00

Direct labor cost per unit = Direct labor incurred / Annual units = $420,000 / 40,000 = $10.50

Variable manufacturing overhead per unit = Variable manufacturing overhead / Annual units = $160,000 / 40,000 = $4.00

Expected special order total relevant cost = (Direct materials cost per unit + Direct labor cost per unit + Variable manufacturing overhead per unit) * Special order units = ($6.00 + $10.50 + $4.00) * 1,000 = $20.50 * 1,000 = $20,500

Expected revenue from the special order = Special order units * Special order selling price per unit = 1,000 * $40 = $40,000

Expected profit from the special order = Expected revenue from the special order - Expected special order total relevant cost = $40,000 - $20,500 = $19,500

Since the expected profit from the special order is $19,500, it therefore implies that accepting it would increase operating income by $19,500.

Therefore, the correct option is d. Increase by $19,500.