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Company X produces widgets. The following information relates to the its current production: Sale price per unit:
Variable costs per unit:$400
Manufacturing
$240
Marketing and administrative
$70
Total fixed costs:
Manufacturing
Marketing and administrative
$760,000 $230,000
A special sales order request was received for 7400 widgets at a price of $350 per widget. Assuming fixed costs remain unchanged, how would operating income be affected if the special order is accepted? (NOTE: Assume the company has capacity and that regular sales are not affected by the special order.)
ANSWER:
To determine how the special order affects operating income, we need to calculate the incremental revenue and incremental costs associated with the order. Here are the steps:
Calculate the total revenue from the special order: [ \text{Total Revenue} = \text{Special Order Price per Unit} \times \text{Number of Units} ] [ \text{Total Revenue} = $350 \times 7,400 = $2,590,000 ]
Calculate the total variable costs for the special order: [ \text{Total Variable Costs} = (\text{Manufacturing Variable Cost per Unit} + \text{Marketing and Administrative Variable Cost per Unit}) \times \text{Number of Units} ] [ \text{Total Variable Costs} = ($240 + $70) \times 7,400 = $310 \times 7,400 = $2,294,000 ]
Determine the incremental operating income: [ \text{Incremental Operating Income} = \text{Total Revenue} - \text{Total Variable Costs} ] [ \text{Incremental Operating Income} = $2,590,000 - $2,294,000 = $296,000 ]
So, if the special order is accepted, the operating income would increase by $296,000.