Mars Inc provided the following information regarding its single product: Direct

Question

Mars Inc provided the following information regarding its single product:

Direct Materials used = $240,000

Direct labor incurred = $420,000

Variable manufacturing overhead = $160,000

Fixed manufacturing overhead = $100,000

Variable selling and administrative expenses = $60,000

Fixed selling and administrative expenses = $20,000

The regular selling price for the product is $80. The annual quantity units produced and sold is 40,000 units (the cost above relate to the 40,000 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory.

What would be the effect on operating income of accepting a special order for 1,000 units at a sale price of $40 per product? The special order units would not requaire any variable selling and administrative expenses?

Explanation / Answer

Perticuals (for 40000) Per Unit Cost Cost for 1000 Unit Directt Material 240000 6 6000 Direct Labour 420000 10.5 10500 Manufacturing Exp 160000 4 4000 Total cost of 1000 Unit 20500 Total Sales Price of 1000 Unit of Special Order $40/unit 40000 Operating Income 19500

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