Question

Special Order

Pope Company manufactures a variety of hiking boots and has received a special one-time-only order from a new customer. Pope has sufficient idle capacity to accept the special order to manufacture 1,000 pairs of boots at a price of $50.00 per pair. Pope’s normal selling price is $65.00 per pair of boots. Variable manufacturing costs are $35.00 per pair and fixed manufacturing costs are $12.00 a pair. Pope’s variable selling expense for its normal line of boots is $1.00 per pair.

What would the effect on Pope’s operating income be if the company accepted the special order?

Pope's operating income would increase by $Answer  if the order was accepted.

Answer 1

Calculation of Increase (decrease) in operating income from acceptance of special order is as follows:

Increase (decrease) in operating income = Increase in sales * Contribution margin per pair

= 1,000 pairs * $ 15.00

= $ 15,000

Thus, Increase in operating income by $ 15,000 if the order was accepted.

Working note:

1. Contribution margin per pair:

The Company has sufficient idle capacity to manufacture special order.

Order price is $ 50.00 per pair

Variable expenses = Variable manufacturing cost = $ 35.00 per pair

Thus, Contribution margin per pair is $ 15.00 ( $ 50.00 - $ 35.00 )

2. Fixed manufacturing cost is absorbed in nature and it's not directly attributable to product cost. Fixed cost is remain unchanged with change in production level.

We can say that, Only incremental fixed cost can be considered while determining the increase or decrease in operating income. In this case there is no incremental fixed thus, Fixed cost is ignored.

3. Variable selling expenses are also ignore as it may incurred only in normal line of business. The special order of 1,000 pairs is lump sum order and company should not have incur any selling expenses towards it.

If we assume company might incur selling expense on special order then contribution margin per pair will reduced to $ 14.00 from $ 15.00. Whereas practically it seems rare to have selling expenses for special order.