Martin Incorporated provided the following information regarding its only product: Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 5000 units at a sale price of $42 per product? (NOTE: Assume regular sales are not affected by the special order. Round any intermediary calculations to the nearest cent.)
A)Decrease by $99,800
B)Increase by $99,800
C)Increase by $210,000
D)Increase by $320,200

Question

Martin Incorporated provided the following information regarding its only product:  Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 5000 units at a sale price of $42 per product? (NOTE: Assume regular sales are not affected by the special order. Round any intermediary calculations to the nearest cent.)
A)Decrease by $99,800 
B)Increase by $99,800 
C)Increase by $210,000 
D)Increase by $320,200

Quizplus · Accepted Answer

First, we need to calculate the contribution margin per unit, which is the difference between the selling price and variable costs per unit:

$72 - $33 - $12 - $10 = $17

Next, we need to calculate the contribution margin ratio, which is the contribution margin per unit divided by the selling price:

$17 / $72 = 0.2361 or 23.61%

Since the special order is for 5,000 units, the total contribution margin will be:

5,000 x $17 = $85,000

Since the special order will not affect regular sales, the only additional cost will be the fixed overhead, which is $28,200. Thus, the operating income from the special order will be:

$85,000 - $28,200 = $56,800

This is an increase in operating income of $56,800 compared to not accepting the special order. Therefore, the answer is B, increase by $99,800.

Martin Incorporated Provided the Following Information Regarding Its Only Product