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5.​​ ​​​Ink-Well​ ​makes​ ​pens​ ​for​ ​$1.00​ ​each,​ ​$0.85​ ​of​ ​variable​ ​costs​ ​and​ ​$0.15​ ​of​ ​allocated​ ​fixed​...

5.​​ ​​​Ink-Well​ ​makes​ ​pens​ ​for​ ​$1.00​ ​each,​ ​$0.85​ ​of​ ​variable​ ​costs​ ​and​ ​$0.15​ ​of​ ​allocated​ ​fixed​ ​overhead per​ ​unit,​ ​and​ ​sells​ ​them​ ​for​ ​$5.00​ ​each.​ ​A​ ​charity​ ​offered​ ​to​ ​pay​ ​$3.00​ ​per​ ​pen​ ​for​ ​a​ ​one-time​ ​order​ ​of 3,500​ ​pens.​ ​Ink-well​ ​has​ ​excess​ ​capacity,​ ​so​ ​the​ ​special​ ​order​ ​would​ ​not​ ​affect​ ​sales.​ ​How​ ​would​ ​operate income​ ​changer​ ​if​ ​the​ ​special​ ​sales​ ​order​ ​is​ ​accepted?

a.​​ ​​​​​​​​​​​​Increase​ ​of​ ​$7,000
b.​​ ​​​​​​​​​​​​Decrease​ ​of​ ​$7,000
c. Increase​ ​of​ ​$7,525
d.​​​​​​​​​​​​Decrease​​of​​$7,525

According to my work it is either a or c. I am not sure whether I should include the .15 allocated fixed overhead per unit.

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Answer #1

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--No the allocated $ 0.15 of fixed overhead will not be considered.
--The sale price for special order = $ 3, while variable cost per unit = $ 0.85. Hence, the Operating income would increase by:
= 3500 pens sold x ($3 - 0.85)
= 3500 x $ 2.15
= $ 7,525

--Correct Answer = Option 'C' Increase of $ 7,525

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5.​​ ​​​Ink-Well​ ​makes​ ​pens​ ​for​ ​$1.00​ ​each,​ ​$0.85​ ​of​ ​variable​ ​costs​ ​and​ ​$0.15​ ​of​ ​allocated​ ​fixed​...
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