Stein Company makes carpets. A customer wants to place a special order for 1,000

Question

Stein Company makes carpets. A customer wants to place a special order for 1,000 carpets in navy blue with the company logo woven in the middle, to be priced at $30 each. Normally, Stein would charge $60 per carpet for this type of order. Stein figures that yarn and backing will cost $12 per carpet, variable overhead (machining, electricity) is $6 per carpet, direct labor is $10 per carpet, and for one setup the labor will be required at $800 per setup. The set-up charge costs are 100% labor. Currently, the workers needed to set up for and make the carpets are working at Stein. Their wages will be paid whether or not the special order is accepted. Stein's policy is to avoid layoffs to the extent possible.

Refer to Figure 12-1. If Stein accepts the special order, by how much will operating income increase or decrease?

Explanation / Answer

e. there will be no effect on operating income

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