Gandolph Company manufactures a product with the following costs per unit at the expected production of 30,000 units: $\begin{array}{lr}
\text { Direct materials } & \$ 4 \
\text { Direct labor } & 12 \
\text { Variable manufacturing overhead } & 6 \
\text { Fixed manufacturing overhead } & 8
\end{array}$ The company has the capacity to produce 40,000 units. The product regularly sells for $40. A wholesaler has offered to pay $32 a unit for 2,000 units.
If the firm is at capacity and the special order is accepted, the effect on operating income would be
A)$-0-.
B)a $4,000 increase.
C)a $16,000 decrease.
D)a $20,000 increase.

Question

Quizplus · Accepted Answer

Since the firm is at capacity, accepting the special order would require reducing regular sales by 2,000 units. The contribution margin lost on the 2,000 units not sold at the regular price is $40 - ($4 + $12 + $6) = $18 per unit. For 2,000 units, this amounts to $36,000. The contribution margin on the special order is $32 - ($4 + $12 + $6) = $10 per unit, or $20,000 for 2,000 units. The net effect is a decrease in operating income of $36,000 - $20,000 = $16,000.

Gandolph Company Manufactures a Product with the Following Costs Per