Walton Company manufactures a product with the following costs per unit at the expected production level of 84,000 units: $\begin{array}{lr}
\text { Direct materials } & \$ 12 \
\text { Direct labour } & 36 \
\text { Variable manufacturing overhead } & 18 \
\text { Fixed manufacturing overhead } & 24
\end{array}$ The company has the capacity to produce 90,000 units.The product regularly sells for $120.A wholesaler has offered to pay $110 a unit for 7,500 units.Suppose the special order is accepted.What would be the effect on Walton's operating income?

Question

Quizplus · Accepted Answer

The effect on operating income is calculated by considering the contribution margin from the special order. The variable cost per unit is $66 ($12 + $36 + $18). The contribution margin per unit for the special order is $44 ($110 - $66). For 7,500 units, the increase in operating income is $330,000 ($44 * 7,500). However, since the fixed costs are already covered, the entire contribution margin increases the operating income, resulting in a $249,000 increase.

Walton Company Manufactures a Product with the Following Costs Per