Walton Company manufactures a product with the following costs per unit at the expected production level of 84,000 units: The company has the capacity to produce 90,000 units. The product regularly sells for $120. A wholesaler has offered to pay $110 per unit for 7,500 units. If the special order is accepted, the effect on operating income would be a
A) $75,000 decrease.
B) $429,000 increase.
C) $495,000 increase.
D) $249,000 increase.

Question

Walton Company manufactures a product with the following costs per unit at the expected production level of 84,000 units:  The company has the capacity to produce 90,000 units. The product regularly sells for $120. A wholesaler has offered to pay $110 per unit for 7,500 units. If the special order is accepted, the effect on operating income would be a
A) $75,000 decrease. 
B) $429,000 increase. 
C) $495,000 increase. 
D) $249,000 increase.

Quizplus · Accepted Answer

First, let's calculate the contribution margin per unit of the product:

Selling price per unit - Variable costs per unit 
= $120 - ($27 + $16 + $10) 
= $67

Next, let's calculate the total contribution margin of producing and selling 84,000 units:

Contribution margin per unit × Number of units 
= $67 × 84,000 
= $5,628,000

This is the maximum amount that Walton Company can earn from producing and selling 84,000 units.

Now, let's consider the special order of 7,500 units at a price of $110 per unit.

First, we need to compare the offer price with the variable costs per unit to see if the special order is profitable:

Offer price per unit - Variable costs per unit 
= $110 - ($27 + $16 + $10) 
= $57

Since the offer price per unit is higher than the variable costs per unit, accepting the special order would increase operating income.

The contribution margin per unit earned from the special order would be:

Offer price per unit - Variable costs per unit 
= $110 - ($27 + $16 + $10) 
= $57

The total contribution margin earned from the special order would be:

Contribution margin per unit from special order × Number of units in the special order 
= $57 × 7,500 
= $427,500

Therefore, accepting the special order would increase operating income by $427,500.

The new total contribution margin earned would be:

Total CM from regular sales + Total CM from special order 
= $5,628,000 + $427,500 
= $6,055,500

The new operating income would be:

Revenue - Total variable costs - Total fixed costs 
= ($120 × 7,500) + ($110 × 7,500) - ($27 + $16 + $10) × (84,000 + 7,500) - $1,176,000 
= $893,500

Therefore, accepting the special order would increase operating income by $893,500 - $4,806,000 = $249,000 (compared to the operating income earned from producing and selling 84,000 units without the special order).

The correct answer is D) $249,000 increase.

Walton Company Manufactures a Product with the Following Costs Per