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Hoffman Corp. currently sells 40,000 dental tools to its normal customers, but it has a capacity to produce 50,000 tools. Its product sells for $30 per tool and the variable costs incurred in manufacturing and selling the product are as follows on a per tool basis:
Direct materials - $8; Direct labor - $4; Sales commission - $2.
A customer has proposed a special order to purchase 10,000 tools at a special price of $20 per unit. If Hoffman accepts the order, the company would not have to pay its sales people their normal commission of $2 per unit, but the company would incur a shipping cost of $3 per unit.
-If Hoffman accepts the special order, how would operating income is affected?
A) Decrease by $80,000
B) Decrease by $120,000
C) Increase by $30,000
D) Increase by $50,000

Question

Quizplus · Accepted Answer

The special order increases operating income by $50,000. The calculation is as follows: Special order revenue ($20 x 10,000 units) = $200,000. Variable costs are direct materials ($8 x 10,000), direct labor ($4 x 10,000), and shipping costs ($3 x 10,000), totaling $150,000. The difference between the special order revenue and the variable costs is $50,000, which is the increase in operating income.

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