Wallyworld Company manufactures a product with the following costs per unit at the expected production level of 84,000 units: $\begin{array}{lr}
\text { Direct materials } & \$ 12 \
\text { Direct labor } & 36 \
\text { Variable manufacturing overhead } & 18 \
\text { Fixed manufacturing overhead } & 24
\end{array}$ The company has the capacity to produce 90,000 units. The product regularly sells for $120.
If a wholesaler offered to buy 4,500 units for $100 each, the effect of the special order on income would be a
A)$450,000 increase.
B)$45,000 increase.
C)$153,000 increase.
D)$90,000 decrease.

Question

Quizplus · Accepted Answer

The special order's effect on income can be calculated by considering the incremental revenue and incremental costs. The incremental revenue from selling 4,500 units at $100 each is $450,000 (4,500 units * $100/unit). The incremental costs include variable costs but not fixed costs, as fixed costs do not change with the special order (assuming capacity to produce additional units without incurring extra fixed costs). The variable costs per unit are the sum of direct materials, direct labor, and variable manufacturing overhead, which total $66 ($12 + $36 + $18). Therefore, the total variable cost for the special order is $297,000 (4,500 units * $66/unit). The increase in income is the incremental revenue minus the incremental costs, which is $153,000 ($450,000 - $297,000).

Wallyworld Company Manufactures a Product with the Following Costs Per