Reference no: EM132972877
Question - X Incorporated manufactures a single product called Product X and is sold at 100 per unit. Cost related to Product X at normal capacity of 625,000 direct labor hours are as follows:
Direct Materials 40 per unit
Direct Labor 25 per unit
Factory Overhead ???
Variable Selling Expense 2 per unit
Fixed Selling Expense 100,000 annually
Direct labor is paid 10 per hour. Overhead is applied to production based on direct labor hours. Budgeted overhead for the year is 5 million, of which, 1,875,000 is fixed.
During the year, X received an order of 50,000 units from a multinational company, Mumu Incorporated. X, who would like to forge a long-term relationship with Mumu, offered a special discounted price of 80 per unit of Product X. Since it is a direct sale, no variable selling expense would be incurred.
Accepting special orders in excess of the normal capacity would mean sacrificing sales to regular customers.
Required -
If X is currently operating at 90% capacity, what would be the effect of accepting the special order to the operating income of X?
The company currently operates at 80% of normal capacity and all units produced are sold. If Mumu accepts the offer, what would happen to the operating income of X?
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