Wallyworld Company manufactures a product with the following costs per unit at the expected production level of 84,000 units: 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.
If the special order is accepted, the effect on operating income would be a
A) $75,000 decrease.
B) $429,000 increase.
C) $249,000 increase.
D) $495,000 increase.

Question

Wallyworld Company manufactures a product with the following costs per unit at the expected production level of 84,000 units:  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.
If the special order is accepted, the effect on operating income would be a
A) $75,000 decrease. 
B) $429,000 increase. 
C) $249,000 increase. 
D) $495,000 increase.

Quizplus · Accepted Answer

To determine the effect on operating income, we need to calculate the total contribution margin of the special order and compare it to the incremental costs that will be incurred to fulfill the order.

Total contribution margin for 7,500 units:

Selling price per unit: $110

Variable cost per unit: $57 + $20 + $10 = $87

Contribution margin per unit: $110 - $87 = $23

Total contribution margin for 7,500 units: $23 x 7,500 = $172,500

Incremental costs to consider:

Direct materials: $4 x 7,500 = $30,000

Direct labor: $6 x 7,500 = $45,000

Variable overhead: $10 x 7,500 = $75,000

Total incremental costs: $30,000 + $45,000 + $75,000 = $150,000

Operating income from the special order:

Total contribution margin - Incremental costs = $172,500 - $150,000 = $22,500

Therefore, the special order would increase operating income by $22,500.

Option A is incorrect because it assumes that the special order would cause a decrease in operating income. Option B and D are incorrect because they overstate the potential increase in operating income. Option C is the correct option because it accurately calculates the impact of the special order on operating income.

Wallyworld Company Manufactures a Product with the Following Costs Per