Question

ABC Company, produces cross-country ski poles that it sells for $ 43 a pair. Operating at capacity, the company can produce 46,000 pairs of ski poles a year. Costs associated with this level of production and sales are given below: Per Pair Total Direct materials $ 15 $ 660,000 Direct labor 5 220,000 Variable manufacturing overhead 2 88,000 Fixed manufacturing overhead 4 176,000 Variable selling expenses 3 132,000 Fixed selling expenses 7 308,000 $ 36 $ 1,584,000 The army would like to make a one-time-only purchase of 8,800 pairs of ski poles for its mountain troops. The army would pay a fixed fee of $ 28 per pair. Due to a recession, the company would otherwise produce and sell only 35,200 pairs of ski poles this year. Total fixed manufacturing overhead cost would be the same whether 35,200 pairs or 44,000 pairs of ski poles were produced. The company would not incur its usual variable selling expenses with this special order. If ABC accepts the army's offer, by how much would net operating income increase or decrease from what it would be if only 35,200 pairs of ski poles were produced and sold during the year? In other words, if they accept the special order, ABC’s total income would __________.

Answer 1

At			44000
Ski Poles Sales price		$43	$1,892,000
Direct Material		$15	$660,000
direct labor		$5	$220,000
Variable manufacturing overhead		$2	$88,000
Variable selling expenses		$3	$132,000
Contribution		$18	$792,000
Fixed manufacturing overhead		$4	$176,000
fixed selling expenses		$7	$308,000
net income		$7	$308,000
If accept special order
At			35200
Ski Poles Sales price		$43	$1,513,600
Direct Material		$15	$528,000
direct labor		$5	$176,000
Variable manufacturing overhead		$2	$70,400
Variable selling expenses		$3	$105,600
Contribution		$18	$633,600
Fixed manufacturing overhead			$176,000
fixed selling expenses			$308,000
net income		$18	$149,600
Income from special order			8800
sales		$28	$246,400
Variable cost
Direct Material		$15	$132,000
direct labor		$5	$44,000
Variable manufacturing overhead		$2	$17,600
net income			$52,800
total income with new offer			$202,400
If company accept new offer , total income will be $ 202400
$52800 income will be increase due to special order.