Dakota Corporation provided the following information regarding its only product

Question

Dakota Corporation provided the following information regarding its only product: Sales price per unit $60; DM used $160,000; DL incurred $230,000; Variable manufacturing overhead $150,000; variable selling and administrative expenses $60,000; fixed manufacturing overhead $80,000; fixed selling and administrative expenses $10,000; units produced and sold $12,000; assume no beginning inventory. Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 1,000 units at a sales price of $55 per product assuming additional fixed manufacturing overhead costs of $7,000 is incurred? (NOTE: Assume regular sales are not affected by the special order.) a) decrease by $2,000; b) decrease by $5,000; c) decrease by $87,000; d) increase by $2,000

Explanation / Answer

Anonymous - 26 minutes later Hi, Total Variable Cost = 600000 (DM + DL + Variable Manufacturing OH + Variable Selling and Administrative OH) Per Unit Variable Cost = 600000/12000 = 50 per unit Sales value for order of 1000 = 1000*55 = 55000 Less Variable Cost = 10000*50 = 50000 Less Additional Fixed Cost = 7000 Net Loss on Additional Order = 55000 - 50000 - 7000 = 2000 (Option A is correct. Income would decrease by 2000.) Thanks, Aman

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