Question

Pacifica Company makes frames. A customer wants to place a special order for 1,000 frames in green with the company logo painted on the frame, to be priced at $70 each. Normally, Pacifica would charge $100 per frame for this type of order. Pacifica estimates that wood and glass will cost $25 per frame, variable overhead (machining, electricity) is $5 per frame, direct labor is $10 per frame, and one setup will be required at $1,500 per setup. The setup charge costs are 100% labor. Currently, the workers needed to set up and make the frames are working at Pacifica. Their wages will be paid whether or not the special order is accepted. Pacifica's policy is to avoid layoffs to the extent possible. If Pacifica accepts the special order, by how much will operating income increase or decrease? Oa. $40,000 increase b. $30,000 increase Oc. $38,500 increase Od. $28,500 increase Oe. There will be no effect on operating income.

Answer 1

Correct answer---------(b) $30,000 Increase

Working

financial advantage (disadvantage) of accepting the special order
Additional Revenue from offer (1000 x $70)	$        70,000.00
Less: Total Additional cost due to acceptance of offer	$        40,000.00
Financial Advantage	$        30,000.00

.

Calculation of Additional Cost of Order
	Per Unit	Total
Direct material	$                25.00	$          25,000.00
Direct labor	$                10.00	$          10,000.00
Variable manufacturing overheads	$                   5.00	$            5,000.00
Total Additional cost due to acceptance of order	$                40.00	$          40,000.00