Reference no: EM133155809

Question - Kampala Company produces a tube with the following unit cost (excludes selling cost):

Direct Materials $2.20

Direct Labour $1.30

Variable Overhead $3.30

Fixed Overhead $2.40

Unit Cost $9.20

The production capacity is 200,000 units per year.

Because of a declining sales, the company expects to produce only 80,000 tubes for the coming year. The company also has fixed selling costs totaling $400,000 per year and variable selling costs of $1.10 per unit sold (which relates to the sales commission on each unit sold).

The tube normally sells for $13.20 each.

At the beginning of the year, a customer from a region outside the area normally served by the company offered to buy 100,000 tubes for $8 each.

The customer also offered to pay all transportation costs as they are outside of the normal region that Kampala sells to.

Since there would be no sales commissions involved, this order would not have any variable selling costs.

Required - Use the above information to answer the following questions about this special order.

Part A: If the company accepts this order, will their operating income increase, decrease, or stay the same?

By how much will operating income change if the order is accepted?

Part B: Assume now that the order from the customer was through your most successful salesperson who is expecting to be paid their commission. Also assume that the customer requires you, Kampala, to pay for any related transportation costs which amount to $3.25 per unit.

Considering these new details, will operating income increase, decrease or stay the same if Kampala accepts the order?

Considering these new details, by how much will operating change if Kampala accepts the order?