Relay Corporation manufactures batons.Relay can manufacture 300,000 batons a year at a variable cost of $750,000 and a fixed cost of $450,000.Based on Relay's predictions for next year,240,000 batons will be sold at the regular price of $5.00 each.In addition,a special order was placed for 60,000 batons to be sold at a 40% discount off the regular price.Total fixed costs would be unaffected by this order.By what amount would the company's operating income be increased or decreased as a result of the special order?
A) $30,000 increase.
B) $36,000 increase.
C) $60,000 decrease.
D) $180,000 increase.

Question

Quizplus · Accepted Answer

The special order price is 60% of the regular price ($5.00), which is $3.00 per baton. The variable cost per baton is $750,000 / 300,000 = $2.50. The contribution margin per baton for the special order is $3.00 - $2.50 = $0.50. For 60,000 batons, the increase in operating income is 60,000 * $0.50 = $30,000.

Relay Corporation Manufactures Batons