Tom Industries has a plant capacity of 70,000 units per month. The company is currently operating at 80% of capacity, resulting in a variable cost per unit of $30 and a fixed cost per unit of $4.10. The regular sales price of Tom's product is $45 per unit. Tom Industries has been asked by Izzy, Inc. to fill a special order for 10,000 units of the product at a special sales price of $40 each. Izzy will market the units in a foreign country under its own brand name. As a result, Tom Industries will have to pay an export attorney a fee of $15,000 to make sure it is complying with export laws and regulations relating to the special order. Additionally, the variable cost per unit will decrease by $5 since sales commissions will not be paid on the special order. You have asked a staff member to calculate the effect on operating income if the special order is accepted. They calculated that the increase in operating income as a result of accepting the special order if $85,000 and sent you the following calculations: GET special sales price $40 special unit variable cost $30 special unit contribution margin $10 units in special order 10,000 contribution margin from special order $100,000 additional fixed costs $15,000 operating income from special order $85,000 Where did the staff member go wrong? A. The staff member included unit fixed costs in their calculations. B. The staff member failed to calculate the amount "given up" from regular sales. C. The staff member did not adjust the unit variable cost for changes related to the special order. D. The staff member did not account for the additional fixed costs from the special order. E. The staff member's calculation is correct.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Tom Industries has a plant capacity of 70,000 units per month. The company is currently operating at 80% of capacity, resulting in a variable cost per unit of $30 and a fixed cost per unit of $4.10. The regular sales price of Tom's product is $45 per unit.

Tom Industries has been asked by Izzy, Inc. to fill a special order for 10,000 units of the product at a special sales price of $40 each. Izzy will market the units in a foreign country under its own brand name. As a result, Tom Industries will have to pay an export attorney a fee of $15,000 to make sure it is complying with export laws and regulations relating to the special order. Additionally, the variable cost per unit will decrease by $5 since sales commissions will not be paid on the special order.

You have asked a staff member to calculate the effect on operating income if the special order is accepted. They calculated that the increase in operating income as a result of accepting the special order if $85,000 and sent you the following calculations:

GET
special sales price	$40
special unit variable cost	$30
special unit contribution margin	$10
units in special order	10,000
contribution margin from special order	$100,000
additional fixed costs	$15,000
operating income from special order	$85,000

Where did the staff member go wrong?

The staff member included unit fixed costs in their calculations.

The staff member failed to calculate the amount "given up" from regular sales.

The staff member did not adjust the unit variable cost for changes related to the special order.

The staff member did not account for the additional fixed costs from the special order.

The staff member's calculation is correct.

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