Walton 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.Suppose the special order is accepted.What would be the effect on Walton's operating income?
$\begin{array}{lr}
\text { Direct materials } & \$ 12 \
\text { Direct labour } & 36 \
\text { Variable manufacturing overhead } & 18 \
\text { Fixed manufacturing overhead } & 24
\end{array}$
A)a $75,000 decrease
B)a $249,000 increase
C)a $429,000 increase
D)a $495,000 increase

Question

Quizplus · Accepted Answer

The effect on operating income is calculated by considering only the variable costs and the offered price. 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, the fixed costs are not relevant as they do not change with the order. Therefore, the correct increase in operating income is $249,000.

Walton Company Manufactures a Product with the Following Costs Per