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The following information relates to a product produced by Faulkland Company:

Direct materials $8
Direct labor 5
Variable overhead 4
Fixed overhead 6
Unit cost $23
Fixed selling costs are $1,010,000 per year.


Variable selling costs of $3 per unit sold are added to cover the transportation cost. Although production capacity is 510,000 units per year, Faulkland expects to produce only 410,000 units next year. The product normally sells for $32 each. A customer has offered to buy 61,000 units for $22 each. The customer will pay the transportation company directly for the transportation charges on the units purchased. If Faulkland accepts the special order, the effect on operating profits would be a:_______

Answer :

Answer:

$305,000 increased

Explanation:

As the total unit cost is given i.e $23

And, the customer has offered to buy 61,000 units at $22 each

In the case of special order, the effect on operating profits is

= Difference of cost × number of units to be offered for buying

= $5 × 61,000 units

= $305,000 increased

The difference is

= Buying price offered - direct material per unit - direct labor per unit - variable overhead per unit

= $22 - $8 - $5 -$4

= $5

The selling cost is not included. Hence, ignored it

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