41. Widget Inc. manufactures widgets. The company has the capacity to produce 10

Question

41. Widget Inc. manufactures widgets. The company has the capacity to produce 100,000 widgets per year, but it currently produces and sells 75,000 widgets per year. The following information relates to current production: Sale price per unit $41 Variable costs per unit Manufacturing Marketing and administrative $6 $22 Total fixed costs: Manufacturing Marketing and administrative $25,000 If a special sales order is accepted for 5,300 widgets at a price of $39 per unit, and fixed costs increase by $16,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.) $80,000 A.Increase by $74,100 B.Increase by $42,300 C.Decrease by $42,300 D.Increase by $74,300 2

Explanation / Answer

SOLUTION

Net operating income will increase by $42,300.

Total Variable cost = Variable Manufacturing Cost + Variable Marketing and administrative

= $22 + $6 = $28

Contribution margin = Sales price - Variable costs

= $39 - $28 = $11

Change in operating income = (Contribution margin * Sale units) - Fixed Costs

= ($11 * 5,300) - $16,000

= $58,300 - $16,000 = $42,300

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