Question

Widget Inc. manufactures widgets. The company has the capacity to produce​ 100,000 widgets per​ year, but it currently produces and sells​ 75,000 widgets per year. The following information relates to current​ production: Sale price per unit $ 41 Variable costs per​ unit: Manufacturing $ 23 Marketing and administrative $ 9 Total fixed​ costs: Manufacturing $ 76,000 Marketing and administrative $ 22,000 If a special sales order is accepted for 2,600 widgets at a price of $ 35 per​ unit, fixed costs increase by $ 7,000​, and variable marketing and administrative costs for that order are $ 1 per​ unit, how would operating income be​ affected? (NOTE: Assume regular sales are not affected by the special order.)

Answer 1

Accepting the special sales order for 2,600 widgets at $35 per unit would increase Widget Inc.'s operating income by $21,600, after accounting for variable costs of $24 per unit and an increase in fixed costs of $7,000.

Step-by-step explanation:

When a company like Widget Inc. considers accepting a special sales order, it need to determine how it will affect its operating income. With the given special order for 2,600 widgets at a price of $35 per unit, we start by calculating the total variable costs involved. The manufacturing variable cost is $23 per unit, and the special order has reduced marketing and administrative variable costs to $1 per unit, leading to a total variable cost of $24 per widget. Multiplying this by 2,600 units gives us $62,400 in total variable costs for the order.

The order also increases fixed costs by $7,000. Since these fixed costs do not change with the number of units produced, we simply add this to the total costs. Next, we calculate the total revenue from the special order by multiplying the sale price per unit by the number of units, which results in $91,000 ($35 x 2,600 units). The increase in operating income is found by subtracting the total costs from the total revenue: $91,000 - $62,400 - $7,000 = $21,600. Hence, the special sales order would increase operating income by $21,600, assuming regular sales remain unaffected.

Answer 2

The operating income would increase by a value of $81,400

Step-by-step explanation:

The operating income is an accounting tool that can be used to gauge the profit from business activities.

We can use this formula to calculate the initial operating income as follows;

Initial operating income=Total revenue from sales-cost of goods sold

where;

Total revenue from sales=sale price per unit×number of units sold

Sale price per unit=$41

number of units sold=75,000

Total revenue from sales=(41×75,000)=$3,075,000

Cost of goods sold=Total fixed cost+total variable cost per unit

Total fixed cost=Manufacturing+marketing and administrative=(76,000+22,000)=$98,000

Total variable cost=Manufacturing+marketing and administrative=(23×75,000)+(9×75,000)=2,550,000

Cost of goods sold=98,000+2,550,000=$2,648,000

Initial operating income=3,075,000-2,648,000=$427,000

Final operating income after accepting the special order=Final revenue-final cost of goods sold

Final revenue=(2,600×35)=91,000

Final cost of goods=7,000+(1×2,600)=9,600

Final operating income after accepting the special order=(91,000-9,600)=81,400

Total operating income=(Initial operating income+final operating income)

Total operating income=$427,000+81,400=$508,400

The operating income would increase by a value of $81,400