Question
Jedi Enterprises makes small toys for the North American market. A customer from Europe has approached Jedi with an offer to purchase 10,000 units of
Jedi Enterprises makes small toys for the North American market. A customer from Europe has approached Jedi with an offer to purchase 10,000 units of their Millennium Falcon toy at a price of $7 each. Each year, they can make 75,000 units of their Millennium Falcon toy but theyre planning on only making 60,000 units this year. The normal sales price is $12 per unit.
Unit cost information for the Millennium Falcon is as follows:
Direct materials | $1.50 |
Direct labour | 2.00 |
Variable factory overhead | 1.00 |
Fixed factory overhead | 3.25 |
Fixed selling & admin. | 0.25 |
Total | $8.00 |
The European company would like their logo affixed to each toy using a label. Each label will cost Jedi Enterprises $0.50 each. The extra cost to ship the Millennium Falcon to Europe is $0.75 per toy. Total fixed costs will not change if they accept this special order.
Required:
How much will operating income increase or decrease if the special order is accepted?
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