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Impact of Special Order on Operating Income

   

Added on  2019-09-23

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Answer 1: Operating income will be increased by $800.Total variable cost for 1000 packs:Direct material= $1.60 x 1000 = $1600Direct manufacturing labor= $0.90 x 1000 = $900Variable manufacturing overhead= $0.70 x 1000 = $700Total variable cost= $1600+$900+$700 = $3200Calculation of contribution of 1000 packs:Sale revenue= $4 x 1000 = $4000Variable cost = $3200Contribution= $4000 - $3200 = $800Answer 2: President’s “below manufacturing costs” reasoning for rejecting the special order is not correct as after accepting the special order the operating income is still increasing by $800. Total relevant cost which is the total variable cost which is less than the revenue from special order will have to be considered instead of total manufacturing cost for this special order.Answer 3:Other factors which the president should consider before accepting and rejecting the special order are as follows:Contribution from the special order.Relevant costs for the special order.No marketing costs.
Impact of Special Order on Operating Income_1

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