Exercise 8-7 The following operating information reports the results of Flounder
ID: 2548973 • Letter: E
Question
Exercise 8-7 The following operating information reports the results of Flounder Company's production and sale of 12,500 air-conditioned motorcycle helmets last year. Based on early market forecasts, Flounder expects the same results this year. Sales Variable manufacturing expenses Fixed manufacturing expenses Variable selling and administrative expenses Fixed selling and administrative expenses $2,374,000 943,000 273,000 118,000 224,000 The American Motorcycle Club has offered to purchase 2,000 helmets at a price of $100 each. Flounder has sufficient idle capacity to fill the order, which would not affect the company's cost structure or regular sales. If Flounder accepts this order, by how much will its income increase or decrease? Operating income wil by $Explanation / Answer
Note :All fixed costs are already covered by regular sales thus are not considered for special order . Similarly , variable selling & admin expenses which incurred for regular sales are not relevant for special order .
Thus only variable manufacturing expenses & any other specific costs (for special order , if any) are relevant costs for special order decision making.
Variable cost per unit = $943,000 / 12,500 units = $75.44 per unit
Total incremental costs due to special order = $75.44 per unit * 2,000 units = $150,880
Total incremental revenue due to special order = $100 per unit * 2,000 units = $200,000
Incremental operating income = $200,000 - $150,880 = $49,120
Operating income will increase by $49,120
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