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 3,000 units at a sale price of $45 per product assuming additional fixed manufacturing overhead costs of $5,000 is incurred? (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 3,000 units at a sale price of $45 per product assuming additional fixed manufacturing overhead costs of $5,000 is incurred? (NOTE: Assume regular sales are not affected by the special order.)

Quizplus · Accepted Answer

To determine the effect of accepting a special order, we need to compare the incremental revenue and costs associated with the order.

Incremental revenue = Sales price per unit x Number of units = $45 x 3,000 = $135,000

Incremental cost = Additional fixed manufacturing overhead costs = $5,000

Therefore, the incremental profit would be:

Incremental profit = Incremental revenue - Incremental cost 
= $135,000 - $5,000 
= $130,000

Since the regular sales are not affected by the special order, the contribution margin per unit for the special order would be the same as the contribution margin per unit for regular sales, which is $32 ($90 - $58).

Thus, the number of units required to cover the additional fixed manufacturing overhead cost would be:

Break-even units = Additional fixed manufacturing overhead cost ÷ Contribution margin per unit 
= $5,000 ÷ $32 
= 156.25 units

Since the number of units in the special order is greater than the break-even units, and the incremental profit is positive, the company should accept the special order.

Therefore, the effect on operating income would be an increase by $49,750 ($130,000 - $80,250), which is the incremental profit from the special order minus the contribution margin that would have been earned on the units sold at regular price.

Samson Incorporated Provided the Following Information Regarding Its Only Product