Question

1. The Cozy Company manufactures slippers and sells them at $ 10 a pair. Variable manufacturing cost is $ 5.75 a​ pair, and allocated fixed manufacturing cost is $ 1.75 a pair. It has enough idle capacity available to accept a​ one-time-only special order of 25,000 pairs of slippers at $ 7.50 a pair. Cozy will not incur any marketing costs as a result of the special order.

What would the effect on operating income be if the special order could be accepted without affecting normal​ sales:

(a)​ $0,
(b) $ 43,750 ​increase,
(c) $ 143,750 ​increase, or​
(d) $ 187,500 ​increase?

Show your calculations.

Answer 1

Answer:

(b) $ 43,750 ​increase

Explanation:

The computation of the effect on operating income is shown below:

= Contribution margin per unit × special order

where,

Contribution margin per unit = Selling price per unit - Variable expense per unit

= $7.50 - $5.75

= $1.75

And, the special order is of 25,000 pairs

Now put these values to the above formula  

So, the value would equal to

= $1.75 × 25,000 pairs

= $43,750

The fixed cost would remain unchanged.

Answer 2

The effect on operating income be if the special order could be accepted without affecting normal​ sales:(b) $ 43,750 ​increase.

Effect on operating income

Sales             $187,500

(25,000×$ 7.50)                    

Less Variable manufacturing  ($143,750)

(25,000× $ 5.75)

Net Income/(loss)                     $43,750

($187,500-$143,750)

Inconclusion the effect on operating income be if the special order could be accepted without affecting normal​ sales:(b) $ 43,750 ​increase.

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