The Molis Corporation has the capacity to produce 15, 000 haks each month.Current regular production and sales are 10, 000 haks per month at a selling price of $15 each.Based on this level of activity, the following unit costs are incurred: The fixed costs, both manufacturing and administrative, are constant in total within the relevant range of 10, 000 to 15, 000 haks per month.Direct labor is a variable cost. The Molis Corporation has received a special order from a customer who wants to pay a reduced price of $10 per hak.There would be no selling expense in connection with this special order.And, this order would have no effect on the company's other sales.
Suppose the special order is for 4, 000 haks this month.If this offer is accepted by Molis, the company's operating income for the month will:
A)increase by $6, 000
B)decrease by $6, 000
C)increase by $5, 000
D)decrease by $5, 000

Question

The Molis Corporation has the capacity to produce 15, 000 haks each month.Current regular production and sales are 10, 000 haks per month at a selling price of $15 each.Based on this level of activity, the following unit costs are incurred:  The fixed costs, both manufacturing and administrative, are constant in total within the relevant range of 10, 000 to 15, 000 haks per month.Direct labor is a variable cost. The Molis Corporation has received a special order from a customer who wants to pay a reduced price of $10 per hak.There would be no selling expense in connection with this special order.And, this order would have no effect on the company's other sales.
Suppose the special order is for 4, 000 haks this month.If this offer is accepted by Molis, the company's operating income for the month will:
A)increase by $6, 000 
B)decrease by $6, 000 
C)increase by $5, 000 
D)decrease by $5, 000

Quizplus · Accepted Answer

To determine the effect of the special order on the Molis Corporation's operating income, we need to calculate the incremental revenues and costs associated with filling the order.

The revenue from the special order would be 4,000 x $10 = $40,000.

The incremental costs associated with the special order would be:

- Direct materials: $2 per unit x 4,000 units = $8,000
- Direct labor: $4.50 per unit x 4,000 units = $18,000
- Variable manufacturing overhead: $1.50 per unit x 4,000 units = $6,000

Total incremental costs would be $32,000.

Since the special order would not affect the company's other sales and there would be no selling expenses associated with it, the only change to operating income would be the increase in revenue of $40,000 and the increase in incremental costs of $32,000.

Therefore, the operating income for the month would increase by $8,000 (=$40,000 - $32,000).

Hence, the best choice is C.

The Molis Corporation Has the Capacity to Produce 15, 000