Choose the best answer.
a) The Woody Company manufactures slippers and sells them at $10 a pair. Variable
manufacturing cost is $4.50 a pair, and allocated fixed manufacturing cost is $1.50 a pair.
It has enough idle capacity available to accept a one-time-only special order of 20,000
pairs of slippers at $6 a pair. Woody will not incur any marketing costs as a result of the
special order. What would the effect on operating income be if the special order could be
accepted without affecting normal sales: (a) $0, (b) $30,000 increase, (c) $90,000
increase, or (d) $120,000 increase? Show your calculations.
b) The Reno Company manufactures Part No. 498 for use in its production line. The
manufacturing cost per unit for 20,000 units of Part No. 498 is as follows:
Direct materials $6
Direct manufacturing labor 30
Variable manufacturing overhead 12
Fixed manufacturing overhead allocated 16
Total manufacturing cost per unit $64
The Tray Company has offered to sell 20,000 units of Part No. 498 to Reno for $60 per
unit. Reno will make the decision to buy the part from Tray if there is an overall savings
of at least $25,000 for Reno. If Reno accepts Tray’s offer, $9 per unit of the fixed
overhead allocated would be eliminated. Furthermore, Reno has determined that the
released facilities could be used to save relevant costs in the manufacture of Part No. 575.
For Reno to achieve an overall savings of $25,000, the amount of relevant costs that
would have to be saved by using the released facilities in the manufacture of Part No. 575
would be which of the following: (a) $80,000, (b) $85,000, (c) $125,000 or (d) $140,000?
Show your calculations.