Relay Corporation manufactures batons. Relay can manufacture 300,000 batons a year at a variable cost of $750,000 and a fixed cost of $450,000. Based on Relay's predictions for next year, 240,000 batons will be sold at the regular price of $5.00 each. In addition, a special order was placed for 60,000 batons to be sold at a 40% discount off the regular price. Total fixed costs would be unaffected by this order. By what amount would the company's net operating income be increased or decreased as a result of the special order?
A)$180,000 increase.
B)$30,000 increase.
C)$36,000 increase.
D)$60,000 decrease.

Question

Quizplus · Accepted Answer

The special order batons are sold at a 40% discount, so the selling price per baton is $5.00 * 60% = $3.00. The variable cost to produce one baton is $750,000 / 300,000 = $2.50. For the special order of 60,000 batons, the total contribution margin is ($3.00 - $2.50) * 60,000 = $0.50 * 60,000 = $30,000. Since fixed costs do not change, this $30,000 is the increase in net operating income.

Relay Corporation Manufactures Batons