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

Question

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.

Required:

Compute the amount by which the operating income would change if the order were accepted.

Explanation / Answer

COGS+Operating Cost = (0.6+3+1.20+0.80+1.50)*2000=7.1*2000

Sales=2000*8

Change in Operating Income =2000*(8-7.1)=1800

We dont consider the fixed components beacuse they wont change with additional units being produced

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