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 8100 widgets at a price of $39 per unit, and fixed costs increase by $13,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)
A)Decrease by $68,000
B)Increase by $108,500
C)Increase by $94,000
D)Increase by $68,000

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 8100 widgets at a price of $39 per unit, and fixed costs increase by $13,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)
A)Decrease by $68,000 
B)Increase by $108,500 
C)Increase by $94,000 
D)Increase by $68,000

Quizplus · Accepted Answer

First, calculate the contribution margin per unit:

Selling price per unit - Variable cost per unit = Contribution margin per unit
$39 - $24 = $15

Next, calculate the total increase in fixed cost:

Total increase in fixed cost = $13,000

Then, calculate the increase in operating income from the special order:

Contribution margin per unit x Number of units in the special order = Increase in operating income
$15 x 8100 = $121,500

Finally, add the increase in operating income from the special order to the original operating income:

Original operating income + Increase in operating income from special order = New operating income
(75,000 units x $15 contribution margin per unit) + $121,500 = $1,246,500

The increase in operating income is:

New operating income - Original operating income = Increase in operating income
$1,246,500 - (75,000 units x $15 contribution margin per unit) - $13,000 = $68,500

Therefore, operating income would increase by $68,500, which is closest to answer choice D ($68,000).