Bush Industries currently manufactures 56,000 units of a product with the following costs per unit Direct...

Bush Industries currently manufactures 56,000 units of a product with the following costs per unit

Direct materials......................................... $6.00

Direct labor.............................................. $18.00

Variable manufacturing overhead............ $9.00

Fixed manufacturing overhead................$12.00

Variable selling..........................................$3.00

Fixed selling..............................................$4.00

The company has the capacity to produce 60,000 units. The product regularly sells for $60. A wholesaler has offered to pay $55 a unit for 5,000 units and will pick up the units, thereby saving Bush the variable selling costs. If the special order is accepted, what would be the increase or decrease in operating income?

Solutions

Expert Solution

Increase in operating income = $86,000

Working

financial advantage (disadvantage) of accepting the special order
Additional Revenue from offer (5000 x $55)	$ 275,000
Less: Total Additional cost due to acceptance of offer	$ 189,000
Financial Advantage	$ 86,000

Calculation of Additional Cost of Order
	Per Unit	Total
Direct material	$ 6.00	$ 30,000
Direct labor	$ 18.00	$ 90,000
Variable manufacturing overheads	$ 9.00	$ 45,000
Additional fixed cost (loss of contribution margin on 1000 units)[24 x 1000]		$ 24,000
Total Additional cost due to acceptance of order	$ 33.00	$ 189,000

The company will have to forgo sales of 1000 units in regular market so normal contribution margin on these 1000 units will be lost.

ekkarill92 answered 1 year ago

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