Question

Welch Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. Welch Manufacturing has excess capacity and sells the product in the market for $200 per unit. The following per unit data apply for sales to regular customers:

variable costs: fixed costs:

direct material $40 fixed manufacturing $30

direct labor $20 fixed marketing $10

variable overhead $10 fixed managerial $25

variable marketing $15

what is the change in operating income if the company accepted to sell 1,000 units as a special order at $140 per unit?

[[selectone]]

a. $10,000 decrease in operating income

b. $50,000 increase in operating income

c. $55,000 in crease in operating income

d. $10,000 increase in operating income

Answer 1

c. $55,000 increase in operating income

Working:-

Total Variable Cost = Direct Material + Direct Labor + Variable Overhead + Variable Marketing

                         = $40+$20+$10+$15

                         = $85

Increase in the Operating Income per Unit = Special Price-Total Variable Cost

= $140-$85

= $55

Total Increase in operating Income = 1000 Units * $55

= $55,000

Hence, the total increase in Operating Income is $55,000.