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.

Question

Macey Everett

Business

7 January, 09:09

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.

+2

Answers (1)

Know the Answer?

Skunk · Answer 1

(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.