Question

Visionary Game Company sells 600,000 units per year of a particular video game cartridge at $20 each. The current unit cost of the game is broken down as follows:

  

Direct materials	$	5.00
Direct labor		2.00
Variable factory overhead		4.00
Fixed factory overhead		3.00
Total	$	14.00

  

At the beginning of the current year, Visionary received a special order for 12,000 of these game per month, for one year only, at a sales price of $11 per unit. To fill the order, Visionary will have to rent additional assembly space at a cost of $18,000 ($1,500 per month).

  

Compute the estimated increase or decrease in annual operating income that will result from accepting this special order.

  

Decrease in operating income

$

Answer 1

Solution:

Sales(12*12000*11)	$1,584,000
Less: Variable Costs
Direct Material (12*12000*5)	$720,000
Direct Labor (12*12000*2)	$288,000
Variable Overheads (12*12000*4)	$576,000
Less: Additional Assembly Space Cost	$18,000
Net Operating Income from Special Order	($18,000)

Net Income Would decrease by $18,000 if Special Order is Accepted.