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 comma 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 comma 750 increase, (c) $ 143 comma 750 increase, or (d) $ 187 comma 500 increase? Show your calculations.

Question

Business

Wolfgang

10 May, 19:09

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 comma 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 comma 750 increase, (c) $ 143 comma 750 increase, or (d) $ 187 comma 500 increase? Show your calculations.

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Answers (1)

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Bossy · Answer 1

(b) $ 43 comma 750 increase

Explanation:

Consider the Incremental Costs and Revenues arising from accepting the Special Order.

Note: Cozy Company has enough idle capacity available to accept a one-time-only special order, therefore the fixed costs are irrelevant for this decision, since order is accepted within the normal operating capacity.

Sales (25,000*$ 7.50) $187,500

Variable manufacturing (25,000 * $ 5.75) ($143,750)

Net Income / (loss) $43,750

Conclusion

Therefore, Operating Income would increase by $43,750 as a result of Accepting the Special Order.

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