Question

Tom Industries has a plant capacity of? 70,000 units and current production is? 55,000 units. At this production volume the variable cost per unit is? $30, and the fixed cost per unit is? $4.10 per unit. The normal selling price of? Tom's product is? $45 per unit. Tom Industries has been asked by? Sadie, Inc., to fill a special order for? 10,000 units of the product at a special sales price of? $40 each. ? Sadie, Inc. will market the units in a foreign country under its own brand? name; the special order is not expected to have any effect on? Tom's regular sales.? However, Tom Industries will have to pay an export attorney a fee of?$15,000 to make sure it is complying with export laws and regulations relating to the special order.

What impact will accepting the special order have on? Tom's operating? income?

A. Accepting the special order will decrease? Tom's operating income.

B. Accepting the special order will not impact? Tom's operating income.

C. Accepting the special order will increase? Tom's operating income.

By how much will operating income change if the special order is? accepted? ?(enter an absolute dollar amount and use commas when? appropriate)

Change in Operating Income

?$ _______.

Answer 1

Option C is correct

Accepting the special order will increase Tom's operating income.

Operating Income will increase by $85,000

Explanation:

If Tom Accepts the additional order there will not be any additional fixed cost.

Therefore contribution margin = $40 - $30 = $10 per unit.

Total Contribution = $10 x 10,000 units = $100,000

Less: Cost of Attorney Fee = $15,000

Net Addition to operating Income = $85,000

Therefore since there is profit, special order shall be accepted.