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 2,000 units at a sale price of $45 per product assuming additional fixed manufacturing overhead costs of $7,000 are incurred?

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 2,000 units at a sale price of $45 per product assuming additional fixed manufacturing overhead costs of $7,000 are incurred?

Quizplus · Accepted Answer

The special order will contribute $20,000 in revenue (2,000 units x $45 per unit) and incur $12,000 in variable costs (2,000 units x $6 per unit). The additional fixed manufacturing overhead costs of $7,000 will not affect the operating income because they are not relevant to the special order. Therefore, the operating income will increase by $5,000 ($20,000 - $12,000 - $7,000).

Venus Corporation Provided the Following Information Regarding Its Single Product