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 1,200 units at a sale price of $47 per product? The 1,200 units would not require any variable selling and administrative expenses. (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 1,200 units at a sale price of $47 per product? The 1,200 units would not require any variable selling and administrative expenses. (NOTE: Assume regular sales are not affected by the special order.)

Quizplus · Accepted Answer

The incremental contribution margin per unit can be calculated as follows:

Sale price per unit - variable cost per unit = contribution margin per unit

$47 - $35 = $12

Therefore, the total contribution margin from the special order of 1,200 units would be:

1,200 units x $12 per unit = $14,400

Since there are no additional variable selling and administrative expenses associated with this special order, the entire contribution margin will flow to operating income.

Therefore, the effect on operating income would be an increase of $28,500 ($14,400 x 2) because the contribution margin ratio is 80% so for each dollar of sales, 80 cents will flow to operating income.

Thus, accepting this special order would be beneficial for the company.

Samson Incorporated Provided the Following Information Regarding Its Only Product