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19 April, 10:13

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.

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Answers (1)
  1. 19 April, 10:38
    0
    (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.
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