The following information relates to a product produced by Orca Company: Fixed selling costs are $1,000,000 per year. Although production capacity is 500,000 units per year, Orca expects to produce only 400,000 units next year. The product normally sells for $80 each. A customer has offered to buy 60,000 units for $60 each. The customer will pay the transportation charge on the units purchased. If Orca accepts the special order, the effect on operating profits would be a:

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andromache andromache · Answer 1 · 2021-05-05T04:10:09+02:00

Answer,:

increase in operating income by $840,000

Explanation:

The computation is shown below:

Offer price per unit $60

Less: Variable costs per unit:

Direct materials ($20)

Direct labor ($14)

Variable overhead ($12)

Variable selling $0

Incremental profit per unit (a) $14

Units offered to sell (b) 60,000

Effect on Operating Income (Increase) (a × b) $840,000

Therefore, in the case when the special order is accepted, the effect on operating income would be increase by $840,000