Figure 17-2 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.
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Refer to Figure 17-2.A wholesaler has offered to pay $110 a unit for 7,500 units.
If the special order is accepted, the effect on operating income would be a
A) $75,000 decrease.
B) $429,000 increase.
C) $495,000 increase.
D) $249,000 increase.

Question

Figure 17-2 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.
-
Refer to Figure 17-2.A wholesaler has offered to pay $110 a unit for 7,500 units.
If the special order is accepted, the effect on operating income would be a
A) $75,000 decrease. 
B) $429,000 increase. 
C) $495,000 increase. 
D) $249,000 increase.

Quizplus · Accepted Answer

To determine the effect of the special order on operating income:
Total revenue with special order = (110 x 7,500) + (120 x 76,500) = $10,245,000
Total cost with special order = (36 + 24 + 14 + 6) x 84,000 + (36 + 24 + 14 + 6) x 7,500 = $7,992,000
Operating income with special order = Total revenue with special order - Total cost with special order = $10,245,000 - $7,992,000 = $2,253,000
Operating income without special order = (120 x 84,000) - (36 + 24 + 14 + 6) x 84,000 = $2,004,000
Therefore, the effect on operating income would be a $249,000 increase (Option D).

Figure 17-2 Walton Company Manufactures a Product with the Following