Question

The Peterson Corporation manufactures a product that it sells for $66.22. The variable costs are $40.91 and the annual fixed costs are $1404898. Peterson's capacity is 103736 units per year but is currently only selling 82510 units per year. This is not expected to change in the future. Peterson was approached to provide 30523 units as a one-time order for a price of $46.58 per unit. If Peterson accepts the special order, what will be the impact on operating income? Select one: a. $173065 b. 5599472 O c5-441615 od. S-62242 Check

Please show work. thank you

Answer 1

Solution

Peterson Corporation

Determination of the impact on the operating income if the special order is accepted:

The correct option is d. $-62,242

Computations:

Special order units = 30,523

Normal capacity = 103,736 units

Current production and sales = 82,510

Excess capacity = 103,736 – 82,510 = 21,236

Now, if the company accepts the special order, the company has to forgo its regular sales of up to 9,297 (30,523 – 21,236) units and the contribution margin thereon.

Contribution margin (at regular sales price)

Unit Sales price = $66.22

Variable cost per unit = $40.91

Unit contribution margin = $25.31

Loss of contribution margin on regular sales sacrificed for special order = $25.31 x 9,297 = $235,307

Contribution margin (special order)

Unit sales price = $46.58

Unit variable cost = $40.91

Unit contribution margin = 46.58 – 40.91 = $5.67

Contribution margin on special order = $5.67 x 30,523 = $173,065

Less: contribution margin lost on regular sales sacrificed = ($235,307)

Net loss from accepting the special order = ($62,242)

Hence, the impact of special order on operating income is a loss of $62,242.

Note: Fixed costs are not affected by acceptance or non-acceptance of special order. Since, fixed costs are constant for the production level of 103,736 units, these costs are relevant for the special order decision.