96000o 16000ni 60 Kvermes ule coStS Manufacturing 16000 uni

$960,00o (16.000.\'ni? @ $60) K--vermes ule coStS: Manufacturing (16,000 units @ $24) Selling (16,000 units $8) $384,000 128,000 512,000 $448,000 Contribution margin Fixed costs: Manufacturing Selling and administrative Operating income $160,000 120,000 280,000 $168,000 A foreign wholesaler wants to buy 1,000 units at a price of $40 per unit. Scott Company will incur both variable manufacturing and variable selling costs on the special order. All fixed costs would remain withh runge Required a. Determine the effect on operating income if the company produces the special order b. Determine the effect on oper ating income if the customer had wanted a special order of 3,000 units and the company produced the special order , indicate whether Scott Company should accept or reject the 1,000- Based on quantitative factors only unit special order and whether Scott Company should accept or reject the 3,000-unit specia identify an important qualitative item that Scotu Company l order. Then should consider in making their final decision

Solution

Solution a:

Net Operating income will increase by $8,000 on accepting special order

Solution b:

Regular contribution margin per unit = $60 - $32 = $28 per unit

Accepting special order of 3000 units will result in regular sale of 1000 units. hence loss of contribution margin from regular sale = 1000 * $28 = $28,000

Net operating income will decrease by $4,000 on accepting the special order.

Solution c:

On the basis of quantitative factor, Scott company should accept the speicla order of 1000 units but reject special order of 3000 units.

The following qualitative items should be considered before making final decision:

1. Whether accepting order at special price may impact regular selling price as regular customer will demand decrease in prices.

2. Customer credit terms and credibility should be considered before accepting special order.

Computation of income from special order
Particulars	Amount
Revenue from special order (1000 * $40)	$40,000.00
Relevant Costs:
Variable manufacturing cost (1000*$24)	$24,000.00
Variable selling expenses (1000*$8)	$8,000.00
Income from special order	$8,000.00