Martin Incorporated provided the following information regarding its only produc

Question

Martin Incorporated provided the following information regarding its only product: Sale price per unit $50.00 Direct materials used $160,000 Direct labor incurred $189,000 Variable manufacturing overhead $121,000 Variable selling and administrative expenses $70,000 Fixed manufacturing overhead $65,000 Fixed selling and administrative expenses $12,000 Units produced and sold 20,000 Assume no beginning inventory Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 5,400 units at a sale price of $41 per product? O A. Increase by $221,400 OB. Decrease by $75,600 OC. Increase by $367,200 OD. Increase by $75,600

Explanation / Answer

Excess capacity is profitable if it is able to recover the variable costs

Fixed costs are sunk costs and not relevant as the new order is within the existing capacity which will not increase the fixed costs further

Variable costs per unit

= Total variable costs / Number of units produced

= (Direct materials + Direct labor + Variable manufacturing overhead + Variable selling expenses) / Number of units produced

= ($160,000 + $189,000 + $121,000 + $70,000) / 20,000

= $27 per unit

Contribution per unit

= New selling price – Variable costs per unit

= $41 - $27

= $14 per unit

So, Excess contribution from new order

= Contribution per unit x Number of units

= $14 x 5,400

= $75,600

So, operating income will increase by $75,600 and option D is the correct option

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