Direct materials £8; Direct labour £15; Variable manufacturing overhead £10; Fix

ID: 2575574 • Letter: D

Question

Direct materials £8; Direct labour £15; Variable manufacturing overhead £10; Fixed manufacturing overhead £12. The company has the capacity to produce 70,000 units. The product regularly sells for £60. A wholesaler has offered to pay £60 each for 5,000 units. If the special order is accepted, the effect on operating income would be a

Select one:

a. £135,000 increase

b. £182,000 decrease

c. cannot be determined

d. £110,000 increase

e. £67,000 increase

If there is excess capacity, the minimum acceptable price for a special order must cover

Select one:

a. variable and fixed manufacturing costs associated with the special order

b. only fixed costs

c. variable and incremental fixed costs associated with the special order

d. only variable costs associated with the special order

e. variable costs and incremental fixed costs associated with the special order, plus the contribution margin usually earned on regular units

Explanation / Answer

the effect on operating income would be = a). £135,000 increase

Working notes for the answer:

Incremental revenue (5,000 units x £60)

300,000

less:

Incremental Cost

Direct materials (5,000 units x £8)

40,000

Direct labor (5,000 units x £15)

75,000

Variable overhead (5,000 units x £10)

50,000

Incremental profit

135,000

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