Relay Corporation manufactures batons.Relay can manufacture 300,000 batons a year at a variable cost of $750,000 and a fixed cost of $450,000.Based on Relay's predictions for next year,240,000 batons will be sold at the regular price of $5.00 each.In addition,a special order was placed for 60,000 batons to be sold at a 40% discount off the regular price.Total fixed costs would be unaffected by this order.By what amount would the company's net operating income be increased or decreased as a result of the special order?

Question

Quizplus · Accepted Answer

The special order price is $3.00 per baton (40% discount on $5.00). The variable cost per baton is $2.50 ($750,000/300,000). The contribution margin per baton for the special order is $0.50 ($3.00 - $2.50). For 60,000 batons, the increase in net operating income is $30,000 (60,000 x $0.50).

Relay Corporation Manufactures Batons