In: Accounting
The Molis Corporation has the capacity to produce 15,000 haks each month. Current regular production and sales are 10,000 haks per month at a selling price of $15 each. Based on this level of activity, the following unit costs are incurred:
Direct materials | $5.00 |
Direct labor | $3.00 |
Variable manufacturing overhead | $0.75 |
Fixed manufacturing overhead | $1.50 |
Variable selling expense | $0.25 |
Fixed administrative expense | $1.00 |
The fixed costs, both manufacturing and administrative, are
constant in total within the relevant range of 10,000 to 15,000
haks per month. Direct labor is a variable cost.
The Molis Corporation has received a special order from a customer
who wants to pay a reduced price of $10 per hak. There would be no
selling expense in connection with this special order. And, this
order would have no effect on the company's other sales.
Suppose the special order is for 6,000 haks this month and thus
some regular sales would have to be given up. If this offer is
accepted by Molis, the company's operating income for the month
will:
A)increase by $6,000
B)increase by $7,500
C)increase by $5,000
D)increase by $1,500
Please explain completely how you got your answer, not just giving the answer without any explanation. Thanks!