Fox Inc.manufactures and sells pens for $5 each.Walton Corp.has offered Fox Inc.$3 per pen for a one-time order of 3,500 pens.The total manufacturing cost per pen,using traditional costing,is $1 per unit,and consists of variable costs of $0.85 per pen and fixed overhead costs of $0.15 per watch.Assume that Fox Inc.has excess capacity and that the special order would not adversely affect regular sales.What is the change in operating income that would result from accepting the special sales order?

Question

Quizplus · Accepted Answer

First, we need to calculate the profit Fox Inc. would make for one pen using traditional costing: 
Revenue per pen = $5 
Variable cost per pen = $0.85 
Fixed overhead cost per pen = $0.15 
Total cost per pen = $1 
Profit per pen = Revenue per pen - Total cost per pen = $5 - $1 = $4

Next, we can calculate the total profit Fox Inc. would make from the special order:
Revenue from special order = $3 per pen x 3,500 pens = $10,500 
Total variable cost from special order = $0.85 per pen x 3,500 pens = $2,975 
Total fixed overhead cost from special order = $0.15 per pen x 3,500 pens = $525 
Total cost from special order = Total variable cost + Total fixed overhead cost = $3,500 
Total profit from special order = Revenue from special order - Total cost from special order = $10,500 - $3,500 = $7,000

Therefore, the change in operating income from accepting the special sales order would be an increase of $7,000.

Fox IncManufactures and Sells Pens for $5 Each