Faux Trees Company produces artificial Christmas trees. A local shopping mall recently made a special order offer; the shopping mall would like to purchase 240 extra-large white trees. Faux Trees Company is currently producing and selling 20,000 trees; the company has the excess capacity to handle this special order. The shopping mall has offered to pay $140 for each tree. An accountant at Faux Trees Company provides an estimate of the unit product cost as follows: This special order would require an investment of $9000 for the molds required for the extra-large trees. These molds would have no other purpose and would have no salvage value. The special order trees would also have an additional variable cost of $5.59 per unit associated with having a white tree. This special order would not have any effect on the company's other sales. If the special order is accepted, the company's operating income would increase (decrease)by
A)$13,800.00 decrease.
B)$17,980.80 decrease.
C)$8980.80 increase.
D)$17,980.80 increase.

Question

Faux Trees Company produces artificial Christmas trees. A local shopping mall recently made a special order offer; the shopping mall would like to purchase 240 extra-large white trees. Faux Trees Company is currently producing and selling 20,000 trees; the company has the excess capacity to handle this special order. The shopping mall has offered to pay $140 for each tree. An accountant at Faux Trees Company provides an estimate of the unit product cost as follows:  This special order would require an investment of $9000 for the molds required for the extra-large trees. These molds would have no other purpose and would have no salvage value. The special order trees would also have an additional variable cost of $5.59 per unit associated with having a white tree. This special order would not have any effect on the company's other sales. If the special order is accepted, the company's operating income would increase (decrease)by
A)$13,800.00 decrease. 
B)$17,980.80 decrease. 
C)$8980.80 increase. 
D)$17,980.80 increase.

Quizplus · Accepted Answer

First, let's calculate the total cost of producing the 240 extra-large white trees:

Variable cost per unit = $11.24 + $5.59 = $16.83
Total variable cost = $16.83 x 240 = $4,039.20
Total fixed cost (molds) = $9,000
Total cost = $13,039.20

Next, let's calculate the revenue the company would receive:

Unit price = $140
Total revenue = $140 x 240 = $33,600

Now, let's calculate the operating income:

Operating income = Total revenue - Total cost
Operating income = $33,600 - $13,039.20
Operating income = $20,560.80

Since the operating income would increase by $20,560.80, the best choice is C.

Faux Trees Company Produces Artificial Christmas Trees