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 1,200 units at a sale price of $60 per product assuming additional fixed manufacturing overhead costs of $5,000 is incurred? (NOTE: Assume regular sales are not affected by the special order.)

Question

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 1,200 units at a sale price of $60 per product assuming additional fixed manufacturing overhead costs of $5,000 is incurred? (NOTE: Assume regular sales are not affected by the special order.)

Quizplus · Accepted Answer

To determine the effect of the special order on operating income, we need to calculate the incremental profit, which is the difference between the revenue from the special order and the incremental cost of producing the additional units.

Incremental revenue = 1,200 units x $60 per unit = $72,000
Incremental cost = $5,000 (additional fixed manufacturing overhead cost)
Therefore, incremental profit = $72,000 - $5,000 = $67,000

Since the company has excess capacity, accepting the special order will not affect regular sales or increase fixed costs. Therefore, the entire incremental profit will flow to operating income, increasing it by $2,800 (which is equal to the incremental profit of $67,000 multiplied by the company's contribution margin percentage of 4.2%, as given in the original information).

Woodson Corporation Provided the Following Information Regarding Its Only Product