Gundy Company manufactures a product with the following costs per unit at the expected production of 30,000 units: $\begin{array}{lr}
\text { Direct materials } & £ 4 \
\text { Direct labour } & 12 \
\text { Variable manufacturing overhead } & 6 \
\text { Fixed manufacturing overhead } & 8
\end{array}$ 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

Question

Quizplus · Accepted Answer

Since the firm is at capacity, accepting the special order would require displacing 2,000 units of regular sales. The contribution margin lost on the displaced units is £8 per unit (£40 selling price - £32 special order price). For 2,000 units, this amounts to a £16,000 decrease in operating income.

Gundy Company Manufactures a Product with the Following Costs Per