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 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

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 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 on operating income, we need to compare the income from the special order to the income if Walton Company continues with the expected production level of 84,000 units.

Expected revenue at 84,000 units = 84,000 x $120 = $10,080,000

Expected total cost at 84,000 units = 84,000 x ($65 + $25 + $12) = $8,988,000

Expected operating income at 84,000 units = $10,080,000 - $8,988,000 = $1,092,000

If the special order is accepted:

Revenue from the special order = 7,500 x $110 = $825,000

Cost of producing 7,500 units = 7,500 x ($65 + $25 + $12) = $675,000

Operating income from the special order = $825,000 - $675,000 = $150,000

Total operating income if the special order is accepted = $1,092,000 + $150,000 = $1,242,000

Therefore, the effect on operating income would be an increase of $1,242,000 - $1,092,000 = $250,000.

The closest answer choice is D, which is a $249,000 increase.

Walton Company Manufactures a Product with the Following Costs Per