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.
-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.
-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

To determine the effect on operating income, we need to compare the incremental revenue from the special order to the incremental costs.

Incremental Revenue = Sale Price per unit x Special order quantity = $110 x 7,500 = $825,000
Incremental Cost = Direct materials + Direct labor + Variable manufacturing overhead = $25 + $45 + $20 = $90

Incremental Profit per unit = Incremental Revenue - Incremental Cost = $110 - $90 = $20

Therefore, the incremental profit from the special order would be:

Incremental Profit = Incremental Profit per unit x Special order quantity = $20 x 7,500 = $150,000

Since the incremental profit is positive, accepting the special order would increase operating income. The increase in operating income would be:

Increase in Operating Income = Incremental Profit = $150,000

Thus, the best answer is B, a $249,000 increase in operating income.

Walton Company Manufactures a Product with the Following Costs Per