AAA Lock Manufacturing Co. makes and sells several models of locks. The cost rec
ID: 2371607 • Letter: A
Question
AAA Lock Manufacturing Co. makes and sells several models of locks. The cost records for the ZForce lock show that manufacturing costs total $24 per lock. An analysis of this amount indicates that $13.92 of the total cost has a variable cost behavior pattern, and the remainder is an allocation of fixed manufacturing overhead. The normal selling price of this model is $32 per lock. A chain store has offered to buy 11,000 ZForce locks from AAA Lock at a price of $16.8 each to sell in a market that would not compete with AAA Lock's regular business. AAA Lock has manufacturing capacity available and could make these locks without incurring additional fixed manufacturing overhead.
Calculate the effect on AAA Lock's operating income of accepting the order from the chain store?
Explanation / Answer
Additional Revenue: 11,000 locks * $16.80/lock = $184,800
Additional Variable Costs: 11,000 locks * $13.92/lock = $153,120
Special Order Contribution Margin: $31,680
Additional Fixed Costs: $0
Change in Operating Income from Special Order: $31,680
If AAA Lock's accepts the special order, their operating income will increase by $31,680.