Question

relay corporation manufactures batons. relay can manufacture 300,000 batons a year at a variable cost of $750,000 and a fixed cost of $450,000. based on relay's predictions for next year, 240,000 batons will be sold at the regular price of $5.00 each. in addition, a special order was placed for 60,000 batons to be sold at a 40% discount off the regular price. total fixed costs would be unaffected by this order. by what amount would the company's operating income be increased or decreased as a result of the special order?

Answer 1

The company's operating income would be increased by $180,000 as a result of the special order.

Step-by-step explanation:

To calculate the company's operating income as a result of the special order, we need to consider the incremental revenue and cost associated with the order.

The regular price is $5.00 per baton, and 240,000 batons will be sold at this price. So the regular revenue from these batons is 240,000 x $5.00 = $1,200,000.

The special order is for 60,000 batons at a 40% discount. So the price per baton for the special order is $5.00 - (40% x $5.00) = $3.00. The revenue from the special order is 60,000 x $3.00 = $180,000.

The total revenue from the regular sales and the special order is $1,200,000 + $180,000 = $1,380,000.

The variable cost per baton is $750,000 / 300,000 = $2.50. So the variable cost for 240,000 batons is 240,000 x $2.50 = $600,000.

The incremental variable cost for the special order is 60,000 x $2.50 = $150,000.

The total variable cost for the regular sales and the special order is $600,000 + $150,000 = $750,000.

The fixed cost is $450,000 and it is unaffected by the special order.

Operating income is calculated by subtracting total cost from total revenue. Total cost is the sum of fixed cost and variable cost. So, total cost is $450,000 + $750,000 = $1,200,000.

Operating income is $1,380,000 - $1,200,000 = $180,000.

Therefore, the company's operating income would be increased by $180,000 as a result of the special order.