1I1. Decision Making (22 points) North Pole Company produces a kind of artificia

Question

1I1. Decision Making (22 points) North Pole Company produces a kind of artificial Christmas tree. Per unit costs to produce and sell one unit of Christmas tree are as follows: Direct labor.. STT Variable manufacturing overhead... $13 Fixed manufacturing overhead...$24 Variable selling expense.$12 S8 The regular selling price of one unit of Christmas tree is $100. A special order has been received by North Pole to purchase 7,000 units of Christmas tree at $90 per unit. The special order will reduce the variable selling expense by 75%. Total fixed manufacturing overhead and fixed selling expenses would be unaffected except that North Pole will need to purchase a specialized machine to make a unique tree topper on each unit of tree in the special order. The machine wi cost $10,500 and will have no use after the special order is filled. ll Assume North Pole has sufficient capacity to produce, calculate the effecet of accepting the special order on its operating income Ans: $ increase decrease (cirele one)

Explanation / Answer

ans) Calculation of effect of accepting the special order on its operating income

Per unit Total

Selling price (7000 Units) 90 630000

Less: Variable costs:

Direct materials (20) (140000)

Direct labour (17) (119000)

Variable manufacturing overhead (13) (91000)

Variable selling expense (3) (21000)

( 12 X (100% - 75%) ______________________________

Contribution margin 37 259000

Less: Fixed cost (10500)

Operating income 248500

By accepting the special order the north pole company operating income increses by 248500

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