Special Order Teddy Company, a manufacturer of stuffed toy bears, budgeted sales

Question

Special Order Teddy Company, a manufacturer of stuffed toy bears, budgeted sales of 400,000 bears at $20/bear for the current year. Variable manufacturing costs were budgeted at $8/bear and fixed manufacturing costs at $5/bear. A special order offering to buy 40,000 bears for $11.50 each was received Teddy Company has sufficient plant capacity to manufacture the additional quantity: however, the production would have to be done by the present work force on an overtime basis at an estimated additional cost of $1.50/bear. Teddy will not incur any selling expenses as a result of the special order. What would be the effect on operating income if the special order could be accepted without affe cting normal sales?

Explanation / Answer

Incremental analysis :

Net operating income increase by 80000

Incremental revenue (40000*11.50) 460000 Incremental cos Variable manufacturing cost (40000*8) 320000 Additional cost (40000*1.5) 60000 Total incremental cost 380000 Incremental profit (loss) 80000

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