$50.00 23.Sale price per unit Direct materials used Direct labor incurred Variab

ID: 2516463 • Letter: #

Question

$50.00 23.Sale price per unit Direct materials used Direct labor incurred Variable manufacturing overhead Variable selling and administrative expenses Fixed manufacturing overhead Fixed selling and administrative expenses Units produced and sold $16,100 $186,000 121,000 $74,000 $65,000 $12,000 22,000 Assume no beginning inventory Martin Incorporated provided the following information regarding its only product Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 3,500 units at a sale price of $41 per product assuming ad costs of $5,100 is incurred? (NOTE: Assume regular sales are not affected by the special order. Round any intermediary calculations to the nearest cent.) C A. Decrease by $75,225 additional fixed manufacturing overhead BIncrease by $75,225 CIncrease by $80,325 DIncrease by $143,500 C

Explanation / Answer

Solution:

Incremental Analysis of Special Order

The company has idle capacity. It means regular sales are not affected by the special order.

In this type of question, relevant cost plays very important role for analysis of special order.

Relevant Cost is the cost to be incurred in future and different under each alternative course of action. In the given question relevant cost is variable cost. Since variable cost varies with the production volume. It means if company accepts order, the variable cost will be incurred (i.e. future cost) and if company do not accept order the variable cost will not be incurred.

Fixed Cost plays no role in this type of analysis. Fixed Costs are period cost that have already been incurred in past. It is SUNK Cost. Whether company accept or reject the order, fixed cost will not change it will remain same.

But the fixed cost directly associated with the special order would be consider while evaluating the special order.

First of all we need to know the relevant variable cost per unit from the existing data

Direct materials used

$16,100

Direct labor incurred

$186,000

Variable Manufacturing OH

$121,000

Variable Selling and Admn OH

$74,000

Total Variable Cost

$397,100

Units Produced

22,000 Units

Relevant Variable Cost Per Unit

(Total Variable Cost / Produced Units)

$18.05

Relevant Variable Cost per unit = $18.05 per unit

Analysis of Special Order

Incremental Sales Revenue from Special Order

(3500 Units x $41)

$143,500

Less: Incremental Variable Cost

(3500*$18.05)

$63,175

Incremental Contribution Margin from Special Order

$80,325

Less: Additional Fixed MF OH

(Future cost and directly associated with special order)

$5,100

Incremental Profit

$75,225

If company accepts the special order, the profit will be increased by $75,225

Hence, the correct option is B. Increase by $75,225

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