3. Star Company manufactures ties. When 28,000 ties are produced, the costs per

Question

3. Star Company manufactures ties. When 28,000 ties are produced, the costs per unit are:
Direct materials $0.60
Direct manufacturing labor $3.00
Variable manufacturing overhead $1.20
Fixed manufacturing overhead $1.60
Variable selling $0.80
Fixed selling $1.13
The ties normally sell for $22 each. The company has received a special order for 2,000 ties at $8.00 per tie. The company will incur an additional variable selling cost of $1.50 per unit with the special order. The company has excess capacity. What’s the amount by which the operating income would change if the order were accepted?

Please show all work

Explanation / Answer

Cost components per unit for each of2000 ties will be as follows :

Direct material cost = $0.60

Direct manufacturing labour cost = $3.00

Variable manufacturing overhead = $1.20

Variable selling expense = $0.80 + $1.50 = $2.30

Total direct/ variable cost per unit = $0.60 + $3.00 + $1.20 + $2.30 = $7.1

Selling price = $8 per unit

Operating margin per tie = Selling price / unit - Total direct/ variable cost/ unit = $8 - $7.1 =$0.90 per tie

Therefore ,

Change in operating income = Operating margin / tie x 2000 ties = $0.90 x 2000 = $1800

AMOUNT BY WHICH OPERATING INCOME WOULD CHANGE = $1800

AMOUNT BY WHICH OPERATING INCOME WOULD CHANGE = $1800

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