Perfect Time Company manufactures and sells watches. Great Products Company has offered Perfect Time $21 per watch for 5,000 watches. Perfect Time's normal selling price is $36 per watch. The total manufacturing cost per watch is $24 and consists of variable costs of $18 per watch and fixed overhead costs of $6 per watch. What is the change in operating income resulting from the special sales order?

Question

Quizplus · Accepted Answer

The change in operating income from the special sales order can be calculated by considering the incremental revenue and incremental costs. The incremental revenue is $21 per watch for 5,000 watches, totaling $105,000. The incremental costs are the variable costs of $18 per watch for 5,000 watches, totaling $90,000. The fixed costs do not change with the special order, so they are not considered in the incremental analysis. Therefore, the change in operating income is $105,000 (incremental revenue) - $90,000 (incremental costs) = $15,000.

Perfect Time Company Manufactures and Sells Watches