Wallyworld Company manufactures a product with the following costs per unit at the expected production level of 84,000 units: $$\begin{array} { l l }
\text { Direct materials } & \$ 12 \
\text { Direct labor } & 36 \
\text { Variable manufacturing overhead } & 18 \
\text { Fixed manufacturing overhead } & 24
\end{array}$$ 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)$249,000 increase.
D)$495,000 increase.

Question

Wallyworld Company manufactures a product with the following costs per unit at the expected production level of 84,000 units: $$\begin{array} { l l } 
\text { Direct materials } & \$ 12 \
\text { Direct labor } & 36 \
\text { Variable manufacturing overhead } & 18 \
\text { Fixed manufacturing overhead } & 24
\end{array}$$ 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)$249,000 increase.
D)$495,000 increase.

Quizplus · Accepted Answer

The special order's effect on operating income can be calculated by considering the incremental revenue and incremental costs. Incremental revenue is $110 per unit for 7,500 units, totaling $825,000. Incremental costs include direct materials ($12), direct labor ($36), and variable manufacturing overhead ($18) per unit, totaling $66 per unit for 7,500 units, which equals $495,000. Fixed costs do not change with the special order since the company has excess capacity. Therefore, the effect on operating income is the incremental revenue minus incremental costs: $825,000 - $495,000 = $330,000 increase. However, the correct calculation should consider the selling price difference from the regular price ($120 - $110 = $10) times the number of units (7,500), which would actually result in a $75,000 decrease if considering the opportunity cost of selling at a lower price. But since the question asks for the effect of accepting the special order on operating income without considering opportunity costs, the calculation focuses on the additional profit from the special order itself. The mistake in the explanation indicates a misunderstanding of the calculation, leading to incorrect options. The correct approach is to calculate the incremental profit directly: Incremental profit per unit is $110 (selling price) - $66 (total variable costs) = $44. For 7,500 units, this equals $44 * 7,500 = $330,000. The error in the initial explanation was in not correctly applying the incremental analysis for the special order decision.

Wallyworld Company Manufactures a Product with the Following Costs Per