Question

The following information relates to a product produced by Faulkland Company: Direct materials $ 10 Direct labor 7 Variable overhead 6 Fixed overhead 8 Unit cost $ 31 Fixed selling costs are $1,000,000 per year. Variable selling costs of $4 per unit sold are added to cover the transportation cost. Although production capacity is 500,000 units per year, Faulkland expects to produce only 400,000 units next year. The product normally sells for $40 each. A customer has offered to buy 60,000 units for $30 each. The customer will pay the transportation company directly for the transportation charges on the units purchased. If Faulkland accepts the special order, the effect on operating profits would be a:

Answer 1

$180,000 Increase

Step-by-step explanation:

The effect on operating profits can be determined by calculating the incremental income or loss arising from the special order.

Incremental analysis of accepting special order

Sales (60,000 × $30) $1,800,000

Less Variable Costs :

Direct materials ($ 10 × 60,000) ($600,000)

Direct labor ($ 7 × 60,000) ($420,000)

Variable overhead ($ 6 × 60,000) ($360,000)

Selling Costs ( $4 × 60,000) ($240,000)

Incremental Income/(loss) $180,000

Conclusion :

If Faulkland accepts the special order, operating income will increase by $180,000.