Inscribe,Inc.manufactures and sells pens for $7 each.Cubby Corp.has offered Inscribe,Inc.$4 per pen for a one-time order of 3500 pens.The total manufacturing cost per pen,using absorption costing,is $1 per unit and consists of variable costs of $0.85 per pen and fixed overhead costs of $0.15 per pen.Assume that Inscribe,Inc.has excess capacity and that the special pricing order would not adversely affect regular sales.What is the change in operating income that would result from accepting the special pricing order?

Question

Quizplus · Accepted Answer

First, let's calculate the contribution margin per pen:
Selling price per pen = $7
Total manufacturing cost per pen = $1
Contribution margin per pen = $7 - $1 = $6

If Inscribe, Inc. accepts the one-time order of 3500 pens from Cubby Corp. at $4 per pen, the contribution margin per pen will be:
Contribution margin per pen = $4 - $1 = $3

The change in operating income can be calculated as follows:
Change in operating income = (Contribution margin per pen x Number of units in the order) - Fixed overhead costs
Change in operating income = ($3 x 3500) - ($0.15 x 3500)
Change in operating income = $10,500 - $525
Change in operating income = $10,975

Therefore, accepting the special pricing order would result in an increase in operating income of $10,975. Option C is the correct answer.