Question

Manganese Company makes frames. A customer wants to place a special order for 750 frames in green with the company logo painted on the frame, to be priced at $60 each. Normally, Manganese would charge $100 per frame for this type of order. Manganese figures that wood and glass will cost $20 per frame, variable overhead (machining, electricity) is $5 per frame, direct labor is $10 per frame. The employee's wages will be paid whether or not the special order is accepted. If Manganese accepts the special order, by how much will operating income increase or decrease?

Answer 1

The answer is: Manganese's operating income will increase by $26,250

Step-by-step explanation:

The total order is worth $45,000 (= 750 frames x $60 per frame).

Manganese will spend $20 in direct materials and $5 in variable overhead per frame, which adds up to $25 cost per frame.

Since Manganese will have to pay their workers salary with or without this special order, we can't consider additional labor costs associated with this special order.

So the total revenue is $45,000 and the total additional costs are $18,750.

So the operating income will increase by $26,250 which is the difference between total revenue and total costs (= $45,000 - $18,750)