Question

Martin Incorporated provided the following information regarding its only product: Sale price per unit $50.00 Direct materials used $164,000 Direct labor incurred $185,000 Variable manufacturing overhead $120,000 Variable selling and administrative expenses $73,000 Fixed manufacturing overhead $65,000 Fixed selling and administrative expenses $12,000 Units produced and sold 25,000

Answer 1

Firstly we need to calculate variable cost per unit which is shown as follows:-

Calculation of Variable Cost per unit (Amounts in $)

Direct materials used	164,000
Direct labor incurred	185,000
Variable manufacturing overhead	120,000
Variable selling and administrative expenses	73,000
Total variable costs (A)	542,000
Total units produced and sold (B)	25,000 units
Variable per unit (A/B)	21.68 per unit

Fixed cost remain same and not affected by accepting the special order.

Therefore operating income will increase by contribution margin from sale of 5,200 units (i.e. special order).

Contribution Margin from special order = (Selling price - Variable cost)*Special order units

= ($40 - $21.68)*5,200 units = $95,264

Therefore operating income will increase by $95,264. Hence the correct option is D.