Gundy Company manufactures a product with the following costs per unit at the expected production of 30,000 units: $\begin{array}{lr}
\text { Direct materials } & \$ 4 \
\text { Direct labour } & 12 \
\text { Variable manufacturing overhead } & 6 \
\text { Fixed manufacturing overhead } & 8
\end{array}$ The company has the capacity to produce 30,000 units.The product regularly sells for $40.A wholesaler has offered to pay $32 a unit for 2,000 units. Suppose the firm chooses to accept the special order and reject some regular sales.What would be the effect on Gundy's operating income?
A) $0
B) a $4,000 increase
C) a $16,000 decrease
D) a $20,000 increase

Question

Quizplus · Accepted Answer

The contribution margin per unit for regular sales is $10 ($40 - $30). For the special order, the contribution margin is $10 ($32 - $22). Rejecting regular sales for the special order results in a $0 net effect per unit. For 2,000 units, this results in a $16,000 decrease in operating income.

Gundy Company Manufactures a Product with the Following Costs Per