Question

Tunnel Incorporated provided the following information regarding its single product: $210,000 $470,000 $170,000 $100,000 $55,000 $20,000 Direct materials used Direct labor incurred Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses The regular selling price for the product is $80. The annual quantity of units produced and sold is 40,000 units (the costs above relate to the 40,000 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory What would be the effect on operating income of accepting a special order for 1,060 units at a sale price of $43 per product? The special order units would not require any variable selling and administrative expenses. (Round any intermediary calculations to the nearest cent. Round your final answer to the nearest dollar.) O A. Increase by $22,525 O B. Increase by $23,055 ° C. Decrease by $23,055 OD. Decrease by $22,525

Answer 1

Solution:

Variable manufacturing cost per unit = ($210000 + $470000 + $170000) / 40000 units = $21.25 per unit

Increase in operating income by accepting special order = Special order Units * (Special order Price - Variable cost per unit)

= 1060 * ($43 - $21.25)

= 1060 * $21.75

= $23,055 Increase

Hence Option "B" is correct.