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.

Required:
Assume North Pole has sufficient capacity to produce, calculate the effecet of accepting the special order on its operating income.

Answer 1

Effect on income= $248,500 increase

Step-by-step explanation:

Because it is a special order, we will not take into account the fixed manufacturing costs and fixed selling costs.

Direct materials= $20

Direct labor= $17

Variable manufacturing overhead= $13

Variable selling expense= 12*0.25= $3

Total unitary cost= $53

Now, we can determine the effect on the income of accepting the offer:

Effect on income= 7,000*(90 - 53) - 10,500

Effect on income= $248,500 increase