Tunnel Incorporated provided the following information regarding its single product: Direct materials used $ 250 comma 000 Direct labor incurred $ 470 comma 000 Variable manufacturing overhead $ 120 comma 000 Fixed manufacturing overhead $100,000 Variable selling and administrative expenses $ 65 comma 000 Fixed selling and administrative expenses $20,000 The regular selling price for the product is $80. The annual quantity of units produced and sold is 43 comma 000 units (the costs above relate to the 43 comma 000 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory. What would be the effect on operating income of accepting a special order for 9 comma 500 units at a sale price of $ 52 per product assuming additional fixed manufacturing overhead costs of $ 11 comma 000 are incurred? (Round any intermediary calculations to the nearest cent.)

increase of $283,058

Explanation:

Consider the incremental Costs and Revenues arising from accepting a special order.

The company has excess capacity therefore, the current fixed overheads would be irrelevant (will have been incurred whether or not the special order is accepted. Also fixed expenses are irrelevant since regular sales will not be affected by this special order.

Sales (9,500× 52)                                                                                  494,000

Direct materials (250,000/43,000×9,500)                                           (55,233)

Direct labor (470,000/43,000×9,500)                                                 (103,837)

Variable manufacturing overhead (120,000/43,000×9,500)               (26,512)

Variable selling and administrative (65,000/43,000×9,500)               (14,360)

Additional fixed manufacturing overhead costs                                    (11,000)

Net Income                                                                                             283,058

Therefore an increase of $283,058 would be expected  from accepting a special order.

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