Glade Industries manufactures and bottles energy drinks.Last year the company made and bottled 2,500,000 units.Glade has the capacity to manufacture and bottle 3,000,000 units per year.Glade has received a special offer from a grocery chain for 500,000 bottles with a special label to be sold as the house brand energy drink.Glade's normal selling price is $0.80 per bottle.The special offer is for $360,000 total ($0.72/bottle).Management estimates that the variable cost per bottle is $0.34; fixed manufacturing overhead is $0.22/bottle.Of the fixed costs assigned to this special order, $2,500 is for the special labels, the remainder is attributable to costs that will be incurred regardless of whether the special order is produced.What is the operating income generated by the special order?
A)$190,000
B)$187,500
C)$80,000
D)$77,500

Question

Quizplus · Accepted Answer

First, we need to calculate the contribution margin per bottle:
Revenue per bottle - Variable cost per bottle = Contribution margin per bottle
$0.80 - $0.34 = $0.46

Next, we need to allocate the fixed costs:
Fixed manufacturing overhead per bottle + Cost of special labels per bottle = Total fixed cost per bottle
$0.22 + ($2,500/500,000) = $0.0225

Now we can calculate the operating income per bottle:
Contribution margin per bottle - Total fixed cost per bottle = Operating income per bottle
$0.46 - $0.0225 = $0.4375

Finally, we can multiply the operating income per bottle by the number of bottles in the special order:
Operating income per bottle x Number of bottles = Operating income from special order
$0.4375 x 500,000 = $218,750

However, we need to subtract the fixed costs that are not attributable to the special order:
Total fixed cost per bottle x Number of bottles in normal production = Fixed costs not attributable to special order
$0.22 x 2,000,000 = $440,000

Operating income from special order - Fixed costs not attributable to special order = Total operating income
$218,750 - $440,000 = -$221,250

Since the total operating income is negative, it means that producing the special order would result in a loss for the company. Therefore, it is not the best choice for Glade Industries.

Glade Industries Manufactures and Bottles Energy Drinks