Question

Knowledge Check 01 Stewart Corporation manufactures solar-powered cal culators. The company can manufecture 1,200,000 calculators a year at a variable cost of $3,000,000 and a fixed cost of $1,800,000 Based on management's projections for next year, 960,000 caleulators will be sold at the regular price of $20.00 each. A special order has been received for 240,000 calculators at $6 per calculator Total fived costs would be unaffected by this order. The company's net operating income will be increased as a result of the special order by $480,000 $600,000 O $840,000 $1,440,000

Answer 1

Excess capacity = 1,200,000 - 960,000 = 240,000

Variable cost per unit = $3,000,000 / 1,200,000

= $2.5

The only relevant costs are the variable costs per unit.

As the relevant cost per unit is less than the special order price per unit and as there is excess capacity, special order can be accepted.

Increase in net operating income = ($6 - $2.5) * 240,000

= $840,000