Venus Corporation provided the following information regarding its single product: $\begin{array}{|l|c|}
\hline \text { Direct materials used } & \$ 240,000 \
\hline \text { Direct labor incurred } & \$ 420,000 \
\hline \text { Variable manufacturing overhead } & \$ 160,000 \
\hline \text { Fixed manufacturing overhead } & \$ 100,000 \
\hline \text { Variable selling and administrative expenses } & \$ 60,000 \
\hline \text { Fixed selling and administrative expenses } & \$ 20,000 \
\hline
\end{array}$
The regular selling price for the product is $75.The annual quantity of units produced and sold is 20,000 units (the costs above relate to the 20,000 units production level).The company has excess capacity and regular sales will not be affected by this special order.There was no beginning inventory.
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What would be the effect on operating income of accepting a special order for 3,000 units at a sale price of $65 per product?

Question

Venus Corporation provided the following information regarding its single product: $\begin{array}{|l|c|}
\hline \text { Direct materials used } & \$ 240,000 \
\hline \text { Direct labor incurred } & \$ 420,000 \
\hline \text { Variable manufacturing overhead } & \$ 160,000 \
\hline \text { Fixed manufacturing overhead } & \$ 100,000 \
\hline \text { Variable selling and administrative expenses } & \$ 60,000 \
\hline \text { Fixed selling and administrative expenses } & \$ 20,000 \
\hline
\end{array}$
 The regular selling price for the product is $75.The annual quantity of units produced and sold is 20,000 units (the costs above relate to the 20,000 units production level).The company has excess capacity and regular sales will not be affected by this special order.There was no beginning inventory.
-
What would be the effect on operating income of accepting a special order for 3,000 units at a sale price of $65 per product?

Quizplus · Accepted Answer

The regular selling price of the product is $75 per unit and the company has excess capacity. Therefore, accepting the special order at a selling price of $65 per unit will not affect the regular sales.

The relevant cost for the special order is the variable cost per unit only, which is $35 ($17+$10+$8).

For the 3,000 units of special order, the additional contribution margin will be: 
$65 (selling price) - $35 (variable cost) = $30 per unit

Total contribution margin for 3,000 units will be:
$30 per unit × 3,000 units = $90,000

Since fixed costs will not be affected, the increase in operating income will be the same as the increase in contribution margin, which is $90,000.

Therefore, the effect on operating income of accepting the special order for 3,000 units at a sale price of $65 per product will be an increase of $63,000 ($90,000 - $27,000).

Venus Corporation Provided the Following Information Regarding Its Single Product