Question

Martin Incorporated provided the following information regarding its only​ product:

Sale price per unit	​$50.00
Direct materials used	$161,000
Direct labor incurred	$190,000
Variable manufacturing overhead	$123,000
Variable selling and administrative expenses	$70,000
Fixed manufacturing overhead	​$65,000
Fixed selling and administrative expenses	​$12,000
Units produced and sold	20,000

Assume no beginning inventory

Assuming there is excess​ capacity, what would be the effect on operating income of accepting a special order for 1,300 units at a sale price of $ 49 per​ product? The 1,300 units would not require any variable selling and administrative expenses.​ (NOTE: Assume regular sales are not affected by the special order. Round any intermediary calculations to the nearest​ cent.)

a. Increase by $30,810

B.Decrease by $30,810

C.Decrease by $32,890

D.Increase by $ 32,890

Answer 1

Option D. Increase by $32890

As there is excess capacity hence special order will add additional contribution

Contribution = Sales - Variable Cost

Calculation of Addition Contribution from sales of 1300 unit , Total variable cost are given for 20000 unit

Sales	1300*49	$63700
Direct Mariaterial	(161000/20000)*1300	$10465
Direct labour	(190000/20000)*1300	$12350
Variable Manufacturing overhead	(123000/20000)*1300	$7995
Contribution		$32890

As the regular sales are not affected hence , the other cost like fixed overhead are already consumed by normal production unit and will not be relevant , and as given for special unit , there will be no selling and admin ovehead .