Question

Rexeleg Company manufactures a product with the following costs per unit at the expected production of 40,000 units:

Direct materials $5
Direct labor 10
Variable overhead 7
Fixed overhead 9
The company has the capacity to produce 50,000 units. The product regularly sells for $50. A wholesaler has offered to pay $43 per unit for 3,000 units.
If the firm chooses to accept the special order and reject some regular sales, the effect on operating income would be a:
a.$30,000 increase.
b.$45,000 decrease.
c.$64,000 increase.
d.$21,000 decrease.

Answer 1

The correct option is D

Step-by-step explanation:

If the special order is accepted by the company then,

Usually 3000 units are sold at $50 per unit

= Units × Price Per unit

= 3,000 × $50

= $150,000

But the wholesalers offers to pay $43 per unit

= Units × Price per unit

= 3,000 × $43

= $129,000

Operating Income = At price $50 per unit - At price $43 per unit

= $150,000 - $129,000

= $21,000

Therefore, the operating income decreased by $21,000.