Rexeleg Company manufactures a product with the following costs per unit at the expected production of 40,000 units:

Direct materials $5

Direct labor 10

Variable overhead 7

Fixed overhead 9

The company has the capacity to produce 50,000 units. The product regularly sells for $50. A wholesaler has offered to pay $43 per unit for 3,000 units.

If the firm chooses to accept the special order and reject some regular sales, the effect on operating income would be a:

a.$30,000 increase.

b.$45,000 decrease.

c.$64,000 increase.

d.$21,000 decrease.

Question

Business

Carter Dougherty

20 September, 06:44

Rexeleg Company manufactures a product with the following costs per unit at the expected production of 40,000 units:

Direct materials $5

Direct labor 10

Variable overhead 7

Fixed overhead 9

The company has the capacity to produce 50,000 units. The product regularly sells for $50. A wholesaler has offered to pay $43 per unit for 3,000 units.

If the firm chooses to accept the special order and reject some regular sales, the effect on operating income would be a:

a.$30,000 increase.

b.$45,000 decrease.

c.$64,000 increase.

d.$21,000 decrease.

+1

Answers (1)

Know the Answer?

Sebastian Berg · Answer 1

The correct option is D

Explanation:

If the special order is accepted by the company then,

Usually 3000 units are sold at $50 per unit

= Units * Price Per unit

= 3,000 * $50

= $150,000

But the wholesalers offers to pay $43 per unit

= Units * Price per unit

= 3,000 * $43

= $129,000

Operating Income = At price $50 per unit - At price $43 per unit

= $150,000 - $129,000

= $21,000

Therefore, the operating income decreased by $21,000.