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 per 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 per 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

First, let's calculate the total cost per unit for Walton Company at the expected production level of 84,000 units:

Direct Materials: $22
Direct labor: $16
Variable Manufacturing Overhead: $10
Fixed Manufacturing Overhead: $8
Total Cost per Unit: $56

Now let's calculate the contribution margin per unit:

Selling Price: $120
Total Cost per Unit: $56
Contribution Margin per Unit: $64

Since the wholesaler is offering to pay $110 per unit, the contribution margin per unit for the special order would be:

Selling Price: $110
Total Cost per Unit: $56
Contribution Margin per Unit: $54

To determine the effect on operating income of accepting the special order, we need to calculate the increase in contribution margin from the special order and compare it to any additional costs incurred.

Increase in Contribution Margin:
Contribution Margin per Unit for Special Order: $54
Contribution Margin per Unit for Regular Sale: $64
Difference: $10

Number of Units in Special Order: 7,500
Increase in Total Contribution Margin: $10 x 7,500= $75,000

Since the special order does not require any additional costs, the entire increase in contribution margin goes straight to operating income.

Therefore, the effect on operating income of accepting the special order would be a $75,000 increase. The correct answer is D.

Walton Company Manufactures a Product with the Following Costs Per