Walton Company manufactures a product with the following costs per unit at the expected production level of 84,000 units:
$\begin{array}{llr}
\text {Direct materials } &\$12\
\text { Direct labour } &36\
\text { Variable manufacturing overhead} &18\
\text { Fixed manufacturing overhead } &24\
\end{array}$
The company has the capacity to produce 90,000 units.The product regularly sells for $120.
-Refer to the figure.A wholesaler has offered to pay $110 a unit for 7,500 units. If the special order is accepted,what would be the effect on operating income?

Question

Walton Company manufactures a product with the following costs per unit at the expected production level of 84,000 units:
$\begin{array}{llr}
  \text {Direct materials  } &\$12\
 \text { Direct labour } &36\
 \text {  Variable manufacturing overhead} &18\
 \text { Fixed manufacturing overhead } &24\
\end{array}$
 The company has the capacity to produce 90,000 units.The product regularly sells for $120.
-Refer to the figure.A wholesaler has offered to pay $110 a unit for 7,500 units. If the special order is accepted,what would be the effect on operating income?

Quizplus · Accepted Answer

The effect on operating income can be calculated by considering the incremental revenue and incremental costs associated with the special order. Incremental revenue is $110 per unit for 7,500 units, totaling $825,000. Incremental costs include direct materials ($12), direct labor ($36), and variable manufacturing overhead ($18) per unit, totaling $66 per unit for 7,500 units, which equals $495,000. Fixed costs do not change with the special order, so they are not considered incremental costs. The effect on operating income is the incremental revenue minus the incremental costs: $825,000 - $495,000 = $330,000 increase. However, since this option is not available, it appears there was a mistake in the calculation or interpretation of the provided options. Given the options, the closest correct approach to determining the impact would involve correctly calculating the incremental profit or loss from accepting the special order, which typically involves subtracting the variable costs from the special order price to find the profit per unit, then multiplying by the number of units in the special order. The fixed manufacturing overhead is not incremental for the special order and should not affect the calculation for the special order's impact on operating income.

Walton Company Manufactures a Product with the Following Costs Per