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

The total cost to produce one frame is:

Wood and Glass: $16
Direct Labor: $12
Variable Overhead: $4
Set-up: $1000 for 600 frames = $1.67 per frame

Total cost per frame: $16 + $12 + $4 + $1.67 = $33.67

If the customer will pay $40 per frame, Fuller will make a profit of $6.33 per frame ($40 - $33.67).

For 600 frames, the profit will be $3,798. If Fuller rejects the order, there will be no additional income, but also no additional costs. Therefore, accepting the order will increase operating income by $3,798 ($6.33 * 600), which is answer choice C.

Figure 13-1. Fuller Company Makes Frames. a Customer Wants to Place a Place