Wallyworld Company manufactures a product with the following costs per unit at the expected production level of 84,000 units: The company has the capacity to produce 90,000 units. The product regularly sells for $120. A wholesaler has
Offered to pay $110 a unit for 7,500 units.
If the special order is accepted, the effect on operating income would be a
A) $75,000 decrease.
B) $429,000 increase.
C) $249,000 increase.
D) $495,000 increase.

Question

Wallyworld Company manufactures a product with the following costs per unit at the expected production level of 84,000 units:  The company has the capacity to produce 90,000 units. The product regularly sells for $120. A wholesaler has
Offered to pay $110 a unit for 7,500 units.
If the special order is accepted, the effect on operating income would be a
A) $75,000 decrease. 
B) $429,000 increase. 
C) $249,000 increase. 
D) $495,000 increase.

Quizplus · Accepted Answer

To determine the effect on operating income, we need to compare the contribution margin of the special order to the incremental costs of producing and selling the additional units.

First, let's calculate the contribution margin per unit:

Contribution margin per unit = Selling price per unit - Variable costs per unit
Contribution margin per unit = $120 - ($50 + $27 + $6)
Contribution margin per unit = $37

Next, let's calculate the incremental costs of producing and selling the additional 7,500 units:

Incremental costs = Variable costs per unit x Additional units
Incremental costs = ($50 + $27 + $6) x 7,500
Incremental costs = $997,500

Comparing the contribution margin per unit to the incremental costs, we can see that the special order would increase operating income by:

Operating income increase = Contribution margin per unit x Additional units - Incremental costs
Operating income increase = ($37 x 7,500) - $997,500
Operating income increase = $278,250

Therefore, the best choice is C, a $249,000 increase in operating income (rounded to the nearest thousand).

Wallyworld Company Manufactures a Product with the Following Costs Per