Walton Company manufactures a product with the following costs per unit at the expected production level of 84,000 units: The company has the capacity to produce 90,000 units. The product regularly sells for $120. A wholesaler has offered to pay $110 per unit for 7,500 units. If the special order is accepted, the effect on operating income would be a

Question

Walton Company manufactures a product with the following costs per unit at the expected production level of 84,000 units:  The company has the capacity to produce 90,000 units. The product regularly sells for $120. A wholesaler has offered to pay $110 per unit for 7,500 units. If the special order is accepted, the effect on operating income would be a

Quizplus · Accepted Answer

In order to determine the effect on operating income, we need to compare the income from the special order to the income that would be earned if the company continued with regular production and did not accept the special order.

Regular production cost per unit = $33 + $18 + $15 = $66
Selling price per unit = $120
Contribution margin per unit = $54 ($120 - $66)

If the company produces and sells 84,000 units:

Total revenue = 84,000 x $120 = $10,080,000
Total variable cost = 84,000 x $66 = $5,544,000
Total contribution margin = $10,080,000 - $5,544,000 = $4,536,000
Total fixed cost = $1,848,000
Operating income = $4,536,000 - $1,848,000 = $2,688,000

If the company produces and sells 7,500 units to the wholesaler:

Total revenue = 7,500 x $110 = $825,000
Total variable cost = 7,500 x $66 = $495,000
Total contribution margin = $825,000 - $495,000 = $330,000
Total fixed cost = $1,848,000
Operating income = $330,000 - $1,848,000 = -$1,518,000

Therefore, if the company accepts the special order, the effect on operating income would be an increase of $2,688,000 - (-$1,518,000) = $4,206,000 or $249,000 per unit ($4,206,000/7,500). Therefore, the correct answer is D.

Walton Company Manufactures a Product with the Following Costs Per