Question

Manganese Company makes frames. A customer wants to place a special order for 750 frames in green with the company logo painted on the frame, to be priced at $60 each. Normally, Manganese would charge $100 per frame for this type of order. Manganese figures that wood and glass will cost $15 per frame, variable overhead (machining, electricity) is $5 per frame, direct labor is $11.5 per frame, and one setup will be required at $1,500 per setup. The set-up charge costs are 100% labor. Currently, the workers needed to set up for and make the frames are working at Manganese. Their wages will be paid whether or not the special order is accepted. Manganese’s policy is to avoid layoffs to the extent possible. If Manganese accepts the special order, by how much will operating income increase or decrease?

Answer 1

Answer:

decrease in operating income for $41,250

Explanation:

The computation of the change in the operating income is shown below:

Total order cost is

= 750 frames × $60

= $45,000

And,

Total cost is

= Charging per frame + cost per frame

= $100 + $15

= $115

So, for 750 frames, it is

= $115 × 750 frames

= $86,250

So as we can see that the total order cost is less than the total cost so it would results into decrease in operating income for $41,250 by taking a difference of $86,250 and $45,000