Felix Time Company manufactures and sells watches for $40 each. Times Products C

Question

Felix Time Company manufactures and sells watches for $40 each. Times Products Company has offered Felix Time $25 per watch for a one-time order of 5,000 watches. The total manufacturing cost per watch is $28 per unit and consists of variable costs of $20 per watch and fixed overhead costs of $8 per watch. Assume that Felix Time has excess capacity and that the special pricing order would not adversely affect regular sales. What is the change in operating income that would result from accepting the special sales order?

Explanation / Answer

Answer:

Contribution per unit of watch from new offer = Offered price per unit - Variable cost per unit = 25 - 20 = $5 per unit

Fixed cost will remain same irrespective of production capacity utilized. So it will not increase due to acceptance of new order. Hence contrubution per unit shall become operating profit per unit.

Increase in Operating Income due to acceptance of new order = No. of watches * Contribution per unit = 5000*5= $25,000.

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