Question

Arthur White Sunglasses sell for about $ 151 per pair. Suppose the company incurs the following average costs per​ pair: LOADING...​(Click the icon to view the cost​ information.) Arthur White has enough idle capacity to accept a​ one-time-only special order from Nevada Glasses for 22 comma 000 pairs of sunglasses at $ 62 per pair. Arthur White will not incur any variable marketing expenses for the order. Read the requirements
Requirement
How would accepting the order affect Arthur White's operating​ income?
In addition to the special​ order's effect on​profits, what other​ (longer-term qualitative) factors should Arthur White's managers consider in deciding whether to accept the​order?
Prepare an incremental analysis to determine the special​order's effect on operating income. ​(Enter a​ "0" for any zero balances.
Use parentheses or a minus sign to indicate a decrease in operating income from the special​ order.) Total Order Incremental Analysis of Special Sales Order Decision Per Unit (22,000 units) Revenue from special order Less variable expense associated with the order: Variable manufacturing costs Contribution margin Less: Additional fixed expenses associated with the order Increase (decrease) in operating income from the special order

Answer 1

Answer:

How would accepting the order affect Arthur White's operating​ income?

• operating income will increase by $88,000

In addition to the special​ order's effect on​profits, what other​ (longer-term qualitative) factors should Arthur White's managers consider in deciding whether to accept the​order?

The most important qualitative factors which cannot be measured in $ are:

• Morale
• Customers
• Investors
• Community
• Products

In this case, the only two factors that could be affected are the investors which will be happy to earn more money and customers which might consider making special orders only. In this case, the special order is feasible because the company has a lot of spare capacity, but what would happen in the future if there is no spare capacity and more customers want to place special orders?

Prepare an incremental analysis to determine the special order's effect on operating income.

                             without special        with special              differential

                             order                        order                         amount

revenue                $0                            $1,364,000                $1,364,000

variable costs      $0                            ($1,276,000)              ($1,276,000)

contribution         $0                             $88,000                   $88,000

margin

fixed costs           $0                             $0                             $0

total effect on      $0                            $88,000                    $88,000

operating income

Explanation:

production costs per unit:

• direct labor $11
• direct materials $39
• variable manufacturing overhead $8
• fixed manufacturing overhead $16
• variable marketing expenses $4
• total $78

sales price $151

special order 22,000 pairs at $62:

since the company has idle capacity, no fixed manufacturing costs nor any variable marketing expenses

total cost per unit = $78 - $16 - $4 = $58

special order's contribution margin = $62 - $58 = $4 x 22,000 = $88,000