Question

Take/Reject a Special Order A company can manufacture a part for $25 per unit, which includes direct materials of $9, direct labor of $6, variable manufacturing overhead of $3, and fixed manufacturing overhead of $7. Productive capacity is 30,000 units annually. The normal sales price is $36 per unit and the company is selling 23,000 units at that price. A foreign buyer offers to buy 2,000 units at $20 per unit. Accepting the order will: Lower operating income by $4,000 Lower operating income by $10,000 Leave operating income unchanged • Increase operating income by $4,000 Increase operating income by $10,000

Please provide detailed explanation. Thank you!

Answer 1

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and format. For detailed answer refer to the supporting sheet.

Answer 2 3When ever we receive a special order, we have to consider only the relevant cost of the product for decision making. Relevant cost All the Variable cost 5 =direct material direct labourtvariable manufacturing overheads 9 +6+3 3$18 0 Note 1 Fixed manufacturing cost is not relevant cost as it has already been incurred, Hence sunk cost 3 Now if we accpet the order 4 Operating income will increase by .5 (offer price- relevant cost )* No. of units 6 = (20-18) 2000 7$4000 operating income will increase 8 9 Thus the correct answer is Increase Operating income By $ 4000 0