Samson Incorporated provided the following information regarding its only product: Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 5,000 units at a sale price of $40 per product? (NOTE: Assume regular sales are not affected by the special order.)

Question

Samson Incorporated provided the following information regarding its only product:  Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 5,000 units at a sale price of $40 per product? (NOTE: Assume regular sales are not affected by the special order.)

Quizplus · Accepted Answer

To determine the effect on operating income, we need to calculate the incremental revenue and incremental cost associated with the special order.

Incremental revenue = 5,000 units x $40 per unit = $200,000

Incremental cost = Direct materials + Direct labor + Variable overhead
= ($10 + $8 + $6) x 5,000 units
= $120,000

Therefore, the incremental profit would be $80,000 ($200,000 - $120,000).

Since the company has excess capacity, accepting the special order would not affect regular sales. Therefore, the operating income would increase by the incremental profit of $80,000.

Samson Incorporated Provided the Following Information Regarding Its Only Product