Fox Inc. manufactures and sells pens for $5 each. Wolf Corp. has offered Fox Inc. $3 per pen for a one-time order of 3,500 pens. The total manufacturing cost per pen, using traditional costing, is $1 per unit, and consists of variable costs of $0.85 per pen and fixed overhead costs of $0.15 per watch. Assume that Fox Inc. has excess capacity and that the special order would not adversely affect regular sales. What is the change in operating income that would result from accepting the special sales order?

Question

Quizplus · Accepted Answer

Total revenue from the special order would be 3,500 pens x $3 per pen = $10,500

The total variable cost of producing 3,500 pens is 3,500 pens x $0.85 per pen = $2,975

The fixed overhead costs of $0.15 per pen do not change, so the total fixed overhead costs for 3,500 pens would be 3,500 pens x $0.15 per pen = $525

Thus, the total cost of producing 3,500 pens would be $2,975 + $525 = $3,500

Operating income from the special order would be:

$10,500 - $3,500 = $7,000

Since the special order results in an increase in operating income, the best choice is C.

Fox Inc Manufactures and Sells Pens for $5 Each