Question

Faux Trees Company produces artificial Christmas trees. A local shopping mall recently made a special order offer; the shopping mall would like to purchase 230 extra-large white trees. Faux Trees Company is currently producing and selling 20,000 trees; the company has the excess capacity to handle this special order. The shopping mall has offered to pay $160 for each tree. An accountant at Faux Trees Company provides an estimate of the unit product cost as follows:
Direct materials $51.61
Direct labor​ (variable) $3.80
Variable manufacturing overhead $1.00
Fixed manufacturing overhead ​$4.00
Total unit cost $60.41

This special order would require an investment of $5,000 for the molds required for the extra−large trees. These molds would have no other purpose and would have no salvage value. The special order trees would also have an additional variable cost of $8.26 per unit associated with having a white tree. This special order would not have any effect on the​ company's other sales. If the special order is​ accepted, the​ company's operating income would increase​ (decrease) by:_______

a. $15679 decrease.
b. $15,679 increase.
c. $16,708 decrease.
d. $10,679 increase.

Answer 1

Answer: $‭16,925.9‬0 increase

Explanation:

Company already has the excess capacity to handle this order so the fixed costs will not be included as they would have already been incurred.

Cost of manufacturing the trees would be:

= Variable cost + Fixed cost

= ((51.61 + 3.80 + 1.00 + 8.26 for white tree) * 230 trees) + 5,000 for molds

= (64.67 * 230) + 5,000

= $‭19,874.1‬0

Incremental revenue = 230 trees * 160

= $36,800

Incremental operating income = 36,800 - ‭19,874.1‬

= $‭16,925.9‬0 increase

Note: Options might be for a variant of this question.