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 800 units at a sale price of $46 per product? (NOTE: Assume regular sales are not affected by the special order.) a) decrease by $800; b) decrease by $3,200; c) increase by $800; d) increase by $3,200

Explanation / Answer

Hi, Total Variable Cost = 600000 (DM + DL + Variable Manufacturing Overhead + Variable Selling and Admin expenses) Per Unit Variable Cost = 600000/12000 = 50 per unit Sales value for order of 1000 = 800*46 = 36800 Less Variable Cost = 800*50 = 40000 Net Loss on Additional Order = 36800 - 40000 = 3200 (Option B is correct. Income would decrease by 3200) Thanks, Aman

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