Question

North Pole Company produces a kind of artificial Christmas tree. Per unit costs to produce and sell one unit of Christmas tree are as follows: Direct materials $20 Direct labor $17 Variable manufacturing overhead $13 Fixed manufacturing overhead $24 Variable selling expense $12 Fixed selling expense $8 The regular selling price of one unit of Christmas tree is $100. A special order has been received by North Pole to purchase 7,000 units of Christmas tree at $90 per unit. The special order will reduce the variable selling expense by 75%. Total fixed manufacturing overhead and fixed selling expenses would be unaffected except that North Pole will need to purchase a specialized machine to make a unique tree topper on each unit of tree in the special order. The machine will cost $10,500 and will have no use after the special order is filled. Calculate the effect of accepting the special order on its operating income.

Answer 1

Accepting the special order would increase North Pole Company's operating income by $248,500. This calculation considers the incremental revenue and costs, including the cost of a specialized machine needed for the order.

Step-by-step explanation:

Calculating the Effect on Operating Income

To calculate the effect of accepting the special order on North Pole Company's operating income, we need to consider the incremental costs and revenues associated with the order. The company is considering a special order for 7,000 units at a reduced price of $90 per unit. The variable costs will be reduced due to a decrease in variable selling expense, and there's the additional cost of the machine needed for the unique tree topper.

Let's calculate the incremental revenue and costs:

• Incremental revenue: 7,000 units × $90 = $630,000
• Incremental direct materials: 7,000 units × $20 = $140,000
• Incremental direct labor: 7,000 units × $17 = $119,000
• Incremental variable manufacturing overhead: 7,000 units × $13 = $91,000
• Variable selling expense (reduced by 75%): 7,000 units × $12 × 25% = $21,000
• Cost of the machine: $10,500

Total incremental costs = $140,000 + $119,000 + $91,000 + $21,000 + $10,500 = $381,500

The increment to operating income by accepting the special order is:

Incremental revenue - Total incremental costs = $630,000 - $381,500 = $248,500

The company will improve its operating income by $248,500 if it accepts the special order.

Answer 2

North Pole Company

Special Order:

The effect of accepting the special order on the operating income is:

Net income will increase by $248,500.

Step-by-step explanation:

a) Data and Calculations:

Per unit costs and selling price:

Normal Special Order

Regular selling price = $100 $90

Direct materials $20 $20

Direct labor $17 17

Variable manufacturing overhead $13 13

Fixed manufacturing overhead $24 0

Variable selling expense $12 3

Fixed selling expense $8 0

Cost of special machine ($10,500/7,000) 1.50

Total relevant cost $54.50

Net income per unit $35.50

Variable selling expense reduced by 75% = $12 * (100 -75%) = $3

Net income will increase by $35.50 * 7,000 = $248,500