Figure 13-1. Fuller Company makes frames.A customer wants to place a special order for 600 frames in green with the company logo painted on the frame,to be priced at $40 each.Normally,Fuller would charge $90 per frame for this type of order.Fuller figures that wood and glass will cost $16 per frame,variable overhead (machining,electricity)is $4 per frame,direct labor is $12 per frame,and one setup will be required at $1,000 per setup.The set-up charge costs are 100% labor.Currently,the workers needed to set up for and make the frames are working at Fuller.Their wages will be paid whether or not the special order is accepted.Fuller's policy is to avoid layoffs to the extent possible.
Refer to Figure 13-1.If Fuller accepts the special order,by how much will operating income increase or decrease?
A)$14,400 increase
B)$12,000 decrease
C)$12,000 increase
D)$21,600 increase
E)there will be no effect on operating income

Question

Quizplus · Accepted Answer

To find out if the special order will increase or decrease operating income, we need to calculate the incremental revenue and incremental costs associated with the order.
Incremental revenue = 600 frames x $40 = $24,000
Incremental costs:
Wood and glass = $16 x 600 = $9,600
Variable overhead = $4 x 600 = $2,400
Direct labor = $12 x 600 = $7,200
Setup cost = $1,000
Total incremental costs = $20,200
Incremental profit = Incremental revenue - Incremental costs = $24,000 - $20,200 = $3,800
Therefore, operating income will increase by $3,800 if Fuller Company accepts the special order. This corresponds to option C.