Question

Pope Company manufactures a variety of hiking boots and has received a special one-time-only order from a new customer. Pope has sufficient idle capacity to accept the special order to manufacture 1,200 pairs of boots at a price of $52.00 per pair. Pope’s normal selling price is $65.00 per pair of sneakers. Variable manufacturing costs are $35.00 per pair and fixed manufacturing costs are $12.00 a pair. Pope’s variable selling expense for its normal line of sneakers is $1.00 per pair.

What would the effect on Pope’s operating income be if the company accepted the special order?

Answer 1

The effect on Pope Company's operating income if they accepted the special order would be an increase of $8,400.

Step-by-step explanation:

To determine the effect on Pope Company's operating income if they accepted the special order, we need to compare the incremental revenue and costs associated with the special order.

The incremental revenue from the special order would be 1,200 pairs of boots multiplied by the special price of $52.00 per pair, which equals $62,400.

The incremental variable manufacturing costs would be 1,200 pairs of boots multiplied by the variable manufacturing cost per pair ($35.00), which equals $42,000.

Therefore, the effect on Pope Company's operating income from accepting the special order would be: Incremental revenue ($62,400) minus Incremental variable manufacturing costs ($42,000) minus Fixed manufacturing costs ($12.00 per pair multiplied by 1,200 pairs), which equals $8,400.

Answer 2

The incremental profit contribution from Pope Company accepting the special order is calculated by subtracting the incremental variable manufacturing costs from the additional revenue generated by the order. The operating income would be positively impacted by this additional contribution, which does not consider fixed costs as they are unchanged and assumes no change in variable selling expenses.

Step-by-step explanation:

The effect on Pope Company's operating income if it accepts the special order to manufacture 1,200 pairs of hiking boots at a price of $52.00 per pair can be calculated by considering the additional revenues and the incremental costs that would be incurred. Since the company has sufficient idle capacity, the fixed costs will remain unaffected. The variable costs of manufacturing the boots amount to $35.00 per pair, and no additional variable selling expenses are mentioned for the special order. Therefore, the incremental profit for the special order can be calculated as follows:

• Additional revenue from special order = 1,200 pairs × $52.00/pair
• Incremental variable manufacturing costs = 1,200 pairs × $35.00/pair
• Incremental profit contribution = Additional revenue - Incremental variable costs

To determine the effect on operating income, subtract the incremental costs from the additional revenue generated through the special order. The calculation does not include variable selling costs as they remain unchanged and the fixed costs, which are not impacted by the order.