Lakeside Inc. produces a product that currently sells for $52.00 per unit. Current production costs per...

Lakeside Inc. produces a product that currently sells for $52.00 per unit. Current production costs per unit include direct materials, $14; direct labor, $16; variable overhead, $7.00; and fixed overhead, $7.00. Product engineering has determined that certain production changes could refine the product quality and functionality. These new production changes would increase material and labor costs by 20% per unit. Lakeside has received an offer from a nonprofit organization to buy 8,400 units at $38.40 per unit. Lakeside currently has unused production capacity.

Required:
a. Calculate the effect on Lakeside's operating income of accepting the order from the nonprofit organization.

ANSWER:

Increase in operating income by: ___________________

Solutions

Expert Solution

	Existing	Proposed
SP	52
Direct Material	14	16.8	(20% increase)
Direct Labor	16	19.2	(20% increase)
Variable Overhead	7	7
Fixed Overhead	7	7
Income	8	-50

New order	8400	units
Selling Price	38.4	per unit


Prouction capacity is underutilized

Therefore, fixed cost will not be relevant

So net operating income from new order from not profit organization will be:-

SP	38.4
Direct Material	14
Direct Labor	16
Variable Overhead	7
Profit per unit	1.4
Units	8400

Increase in operating income	11760

ie $11760

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