Do the Hustle Company, a manufacturer of bell bottom jeans, has the capacity to

Question

Do the Hustle Company, a manufacturer of bell bottom jeans, has the capacity to produce 15,000 pairs of jeans each month. Current production and sales are 10,000 pairs per month at a selling price of $15 each. Based on this level of activity, the following unit costs are incurred: irect Materials $3.00 Variable MOH S0.75 $1.50 Hustle has received a special order from a customer who wants to pay a reduced price of $10 per pair of jeans for an order of 6,000 pairs of jeans. If the special order is accepted, what will be the change in operating income? O A. increase of $5,000 O B. increase of $1,250 ° C. decrease of $30,000 O D. increase of $7,500 O E. decrease of $6,250

Explanation / Answer

Answer: The correct answer is B i.e. Increase of $1,250

Variable Cost = Direct Material + Direct Labor + Variable Manufacturing Overhead
Variable Cost = $5 + $3 + $0.75
Variable Cost = $8.75

Total Fixed Cost = Fixed Manufacturing Overhead * No. of pairs
Total Fixed Costs = $1.50 *10,000
Total Fixed Costs = $15,000

Contribution Margin = $15 -$8.75
Contribution Margin = $6.25

Special Contribution Margin = Reduced price – Variable Costs
Special Contribution Margin = $10 - $8.75
Special Contribution Margin = $1.25

Net Increase in Net Income = 6,000 * $1.25 – 1,000 * $6.25
Net Increase in Net Income = $7,500 - $6,250
Net Increase in Net Income = $1,250

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