Tunnel Incorporated provided the following information regarding its single prod

Question

Tunnel Incorporated provided the following information regarding its single product:

The regular selling price for the product is $80. The annual quantity of units produced and sold is 44,000 units (the costs above relate to the 44,000 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory.

What would be the effect on operating income of accepting a special order for 1050 units at a sale price of $43 per product? The special order units would not require any variable selling and administrative expenses. (Round any intermediary calculations to the nearest cent. Round your final answer to the nearest dollar.)

Increase by $20,045

Decrease by $23,956

Increase by $23,956

Decrease by $20,045

Direct materials used $220,000 Direct labor incurred $470,000 Variable manufacturing overhead $150,000 Fixed manufacturing overhead $100,000 Variable selling and administrative expenses $55,000 Fixed selling and administrative expenses $20,000

Explanation / Answer

Ans)

Variable production costs per unit = Direct materials +Direct labour + Variable manufacturing overhead / No.of units

= 220,000 + 470,000 + 150,000 / 44000

= 19.09 per unit

Fixed costs and variable selling and administrative expenses would not change so they are not reelvant

Contribution from special order = (43 - 19.09 ) X 1050 = 25105.5

So theincome increases by 25105.5

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