Sundial Company manufactures and sells watches for $42 each.Tick-Tock Company has offered Sundial $30 per watch for a one-time order of 5900 watches.The total manufacturing cost per watch is $28 per unit and consists of variable costs of $20 per watch and fixed overhead costs of $8 per watch.Assume that Sundial has excess capacity and that the special pricing 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

The change in operating income from accepting the special order is calculated by taking the special order price ($30) minus the variable cost per unit ($20), which equals $10 per watch. Multiplying this by the number of watches (5900) gives an increase of $59,000 in operating income. Fixed costs are not affected by the decision since they would remain the same whether the special order is accepted or not, and the company has excess capacity.

Sundial Company Manufactures and Sells Watches for $42 Each