Question

Fox, Inc. manufactures and sells pens for $7 each. Walton Corp. has offered Fox, Inc. $3 per pen for a one-time order of 3,500 pens. The total manufacturing cost per pen, using absorption costing, is $1 per unit and consists of variable costs of $0.75 per pen and fixed overhead costs of $0.25 per pen. Assume that Fox, Inc. has excess capacity and that the special pricing order would not adversely affect regular sales. What is the change in operating income that would result from accepting the special pricing order?

Answer 1

Operating income will rise by $7,500

Step-by-step explanation:

If the Fox, Inc. can complete the order and it wouldn´t affect them inthe regular sales, they would just have to calculate the price of making each pen, which is one dollar per pen, with absorption costs, and then withdraw that from the income they will make for the sale:

3,500 pens at 3 dollars=10,500

We withdraw the 3,500 from making them:

10,500-3,500= 7,000

So the income will increase by $7,000 is they take the order.