Woodson Corporation provided the following information regarding its only product: $\begin{array}{|l|r|}
\hline\text { Sale price per unit } & \$ 65.00 \
\hline \text { Direct materials used } & \$ 160,000 \
\hline \text { Direct labor incurred } & \$ 185,000 \
\hline \text { Variable manufacturing overhead } & \$ 120,000 \
\hline \begin{array}{l}
\text { Variable selling and administrative } \
\text { expenses }
\end{array} & \$ 70,000 \
\hline \text { Fixed manufacturing overhead } & \$ 65,000 \
\hline \text { Fixed selling and administrative expenses } & \$ 12,000 \
\hline \text { Units produced and sold } & 10,000 \
\hline & \
\hline \text { Assume no beginning inventory } &\
\hline
\end{array}$
- Assuming there is excess capacity,what would be the effect on operating income of accepting a special order for 1,000 units at a sale price of $55 per product? (NOTE: Assume regular sales are not affected by the special order.)

Question

Quizplus · Accepted Answer

Since regular sales are not affected by the special order, the only additional cost associated with the special order would be the variable cost of producing the additional units. From the given information, the variable cost per unit is $30.

Therefore, the contribution margin per unit for the special order is: 
$55 - $30 = $25

Multiplied by the number of units in the special order (1,000), the total contribution margin would be: 
$25 x 1,000 = $25,000

Since there is excess capacity, accepting the special order would not affect the fixed costs. Therefore, the increase in operating income would be equal to the increase in contribution margin, which is $25,000.

Thus, the correct answer is C: Increase by $1,500.

Woodson Corporation Provided the Following Information Regarding Its Only Product