Assume that the price offered by the foreign company is $43 per unit.Accepting the special order will cause JCN's operating income to:
A)Increase by $18,000.
B)Decrease by $2,000.
C)Decrease by $33,000.
D)Decrease by $35,000.

Question

Quizplus · Accepted Answer

To find out the effect of the special order on JCN's operating income, we need to calculate the incremental revenue and incremental costs associated with the special order.

Incremental Revenue = Special Order Quantity x Price per unit
= 2000 x $43
= $86,000

Incremental Costs = Direct Materials + Direct Labor + Variable Manufacturing Overhead + Shipping Costs
= $15 + $10 + $6 + $2
= $33 per unit

Total Incremental Costs = Incremental Costs per unit x Special Order Quantity
= $33 x 2000
= $66,000

Incremental Profit = Incremental Revenue - Incremental Costs
= $86,000 - $66,000
= $20,000

Therefore, accepting the special order will increase JCN's operating income by $20,000. However, the question asks for the effect on operating income, not incremental profit.

Operating Income = Total Revenue - Total Costs

If JCN accepts the special order, its total revenue will increase by $86,000, but its total costs will also increase by $66,000.

Total Revenue = 20,000 units x $75 per unit = $1,500,000 + $86,000 (special order) = $1,586,000
Total Costs = Fixed Costs + Variable Costs per unit x Total units 
= $600,000 + $30 x 20,000 = $1,200,000 + $66,000 (special order) = $1,266,000

Operating Income = Total Revenue - Total Costs
= $1,586,000 - $1,266,000
= $320,000

Compared to the original operating income of $302,000, accepting the special order will increase JCN's operating income by $18,000 ($320,000 - $302,000). Therefore, the answer is A) Increase by $18,000.

Assume That the Price Offered by the Foreign Company Is