Wolff Co. sells product P at a price of $38 a unit. The per-unit cost data are: direct materials $8, direct labour $10, and overhead $12 (25% fixed and 75% variable). Wolff has sufficient capacity to accept a special order for 40,000 units just received. Selling costs associated with this order would be $3 per unit. At a selling price of $33 per unit, the operating income will:
A)Increase by $60,000
B)Increase by $80,000
C)Increase by $120,000
D)Increase by $160,000

Question

Quizplus · Accepted Answer

First, let's calculate the per-unit cost for the special order:

Direct materials: $8
Direct labour: $10
Variable overhead: $12 x 75% = $9
Total variable cost per unit: $27
Fixed overhead per unit: $12 x 25% = $3
Total cost per unit: $30

Adding the selling cost of $3 per unit, the total cost per unit for the special order is $33.

Since the selling price of the special order is also $33 per unit, the contribution margin is $0 ($33 - $30). This means that the special order will not contribute to the operating income.

Therefore, we should not accept the special order and the operating income will remain the same.

Wolff Co Sells Product P at a Price of $38 a a Unit