Question

1. NAM manufactures yoga props such as straps and blocks. Straps are sold to customers at a price of $15 per strap. The company is currently operating at 75% capacity with regard to strap production and produces 30,000 straps per year. At the current operating level, the cost of producing and selling a single strap is as follows:

Variable Product Costs	$3.20
Fixed Product Costs	1.30
Variable Period Costs	0.50
Fixed Period Costs	0.45
Total Cost per Mat	$5.45

An order has been received from a chain of yoga studios for 12,000 straps at a special price of $10 per strap. If the special order is accepted, the unit variable manufacturing costs will increase by $0.20 per strap due to the addition of a special label the studio has requested be included on the straps. Additionally, the total fixed product costs will increase by 5%. Variable period costs consist solely of sales commissions, which will not be paid on the special order. Fixed period costs will not be affected by acceptance of the special order.

What is the effect on operating income if the special order is accepted? (indicate the amount and if operating income would increase or decrease) (circle your final answer

Answer 1

	Reject order	Accept order	Net income Increase (Decrease)
Revenues		12,000*$10 = $120,000	$                                                   120,000
Variable product cost		12,000*$3.40 = $40,800	$                                                   (40,800)
Fixed product cost		(30,000*$1.30)*5% = $1,950	$                                                      (1,950)
Net income		$                                           77,250	$                                                      77,250

You can reach me over comment box if you have any doubts. Please rate this answer