II. Decision Making (22 points) North Pole Company produces a kind of artificial
ID: 2596469 • Letter: I
Question
II. Decision Making (22 points) North Pole Company produces a kind of artificial Christmas tree. Per unit costs to produce and sell one unit of Christmas tree are as follows: Direct materials... Direct labor. Variable manufacturing overhead..13 Fixed manufacturing overhead.. Variable selling expense. Fixed selling expense... $20 $17 $24 $12 $8 The regular selling price of one unit of Christmas tree is $100. A special order has been received by North Pole to purchase 7,000 units of Christmas tree at $90 per unit. The special order will reduce the variable selling expense by 75%. Total fixed manufacturing overhead and fixed selling expenses would be unaffected except that North Pole will need to purchase a specialized machine to make a unique tree topper on each unit of tree in the special order. The machine will cost $10,500 and will have no use after the special order is filled. Assume North Pole has sufficient capacity to produce, calculate the effect of accepting the special order on its operating income increase decrease (circle one) Ans: $Explanation / Answer
CURRENT COSTS PER UNIT PER UNIT COST FOR SPECIAL ORDER Remarks Cost component Cost $ Cost $ Special order is for 7000 units Direct Material 20.00 20.00 Direct Labor 17.00 17.00 Variable Manufacturing Overheads 13.00 13.00 Fixed Manufacturing Overheads 24.00 24.00 Variable Selling Expenses 12.00 3.00 These expenses are reduced by 75% Fixed Selling Expenses 8.00 8.00 Per Unit cost of specialized machine 0.00 1.50 Total cost $ 10,500 divided by 7000 (no, of units) as it will be of no use thereafter 94.00 86.50 Selling price per unit 100.00 90.00 Profit 6.00 3.50 Effect on operating income Increase by $ 3.50 per unit Total effect $ 24,500 increase in operating income