Widget Inc. manufactures widgets. The company has the capacity to produce 100,000 widgets per year, but it currently produces and sells 75,000 widgets per year. The following information relates to current production: If a special sales order is accepted for 2800 widgets at a price of $36 per unit, fixed costs increase by $9000, and variable marketing and administrative costs for that order are $3 per unit, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)
A)Increase by $28,000
B)Decrease by $19,000
C)Increase by $19,000
D)Increase by $27,400

Question

Widget Inc. manufactures widgets. The company has the capacity to produce 100,000 widgets per year, but it currently produces and sells 75,000 widgets per year. The following information relates to current production:  If a special sales order is accepted for 2800 widgets at a price of $36 per unit, fixed costs increase by $9000, and variable marketing and administrative costs for that order are $3 per unit, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)
A)Increase by $28,000 
B)Decrease by $19,000 
C)Increase by $19,000 
D)Increase by $27,400

Quizplus · Accepted Answer

- The revenue from the special sales order would be: 
   $36 per unit x 2800 units = $100,800
- The variable costs for the special sales order would be: 
   $3 per unit x 2800 units = $8,400
- The incremental fixed costs for the special sales order would be: $9000
- Therefore, the operating income from the special sales order would be: 
   $100,800 - $8,400 - $9,000 = $83,400
- As the regular sales are not affected by the special order, the total operating income would be: 
   $75,000 (from regular sales) + $83,400 (from special sales order) = $158,400
- Compared to the current operating income of $75,000, the operating income would increase by $83,400 - $9,000 = $19,400.
- Therefore, the correct answer is C) Increase by $19,000.