Backyard Living sells its barbecue sets for $170 each
Suppose the company incurs the following average cost per barbecue set:
Direct materials $52
Direct labor 28
Variable manufacturing overhead 11
Variable selling expenses 5
Fixed manufacturing overhead* 24
Total cost $120
* $ 1,800,000 / 75,000 units
Backyard Living has enough idle capacity to accept a one-time-only special order from Superstore, Inc for 2,000 barbecue sets at a sales price of $130 per set. Backyard Living will not incur $2 of variable selling expenses for this order.
How would accepting the order affect Backyard Living's operating income?
What will be an ideal response
Relevant variable costs:
Direct materials $52
Direct labor 28
Variable manufacturing overhead 11
Variable selling expenses 3
Total relevant variable costs $94
Expected increase in revenue (2,000 sets x $130 ) $260,000
Expected increase in variable manufacturing costs (2,000 sets x $94 ) 188,000
Expected increase in operating income (2,000 sets x $36 ) $72,000
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