Question

The following information relates to a product produced by Faulkland Company:

Direct materials	$	10
Direct labor		7
Variable overhead		6
Fixed overhead		8
Unit cost	$	31

Fixed selling costs are $1,000,000 per year. Variable selling costs of $4 per unit sold are added to cover the transportation cost. Although production capacity is 500,000 units per year, Faulkland expects to produce only 400,000 units next year. The product normally sells for $40 each. A customer has offered to buy 60,000 units for $30 each. The customer will pay the transportation charge on the units purchased. If Faulkland accepts the special order, the effect on income would be a:

a) $60,000 increase.

b) $180,000 increase.

c) $420,000 increase.

d) $600,000 decrease.

Answer 1

Special order size = 6,000 units

selling price per unit in special order = $30

Direct materials = $10 per unit

Direct labor = $7 per unit

Variable overhead = $6 per unit

Special Order Analysis
Sales (60,000 x 30)	1,800,000
Expenses:
Direct material (60,000 x 10)	-600,000
Direct labor (60,000 x 7)	-420,000
Variable overhead (60,000 x 6)	-360,000
Net income	$420,000

If Faulkland accepts the special order, the effect on income would be a $420,000 increase.

Correct option is c.

Kindly comment if you need further assistance. Thanks‼!