Answer:
1) Accepting would decrease operating income by $154,000. As a result Ludolph should not accept the order.
Revenue = $308,000
Variable cost = -$426,000
Contribution margin = -$154,000
Less Fixed cost = $0
Decrease in operating income = $154,000
Explanation:
Contribution = sales - Variable cost
= (14,000*$22) - (14,000*33)
=$308,000 - $426,000
= -$154,000
Factors to considers when dealing with special orders:
Fixed costs in total do not change and are not a relevant factor.
Direct material is obviously going to increase as more units are to be produced.
Factory overheads will increase too
Direct labor depends on whether the labor is paid for based on full capacity even though it is producing less if yes then there will not be an increase in labor until the extra effort above the full capacity. If Labor is paid for what it is currently producing then for every extra unit it produces it will be paid meaning direct labor will increase as well just like in our activity here.
There are no selling and marketing costs because the order already has an intended customer.
