Hello,
I'm preparing for CMA Part2 for Jan and Feb'21 window, in the same would like your help in understanding of "Variable Selling and expenses consideration in special offer decision making, what if ideal capacity? is it relevant or irrelevant cost? i have seen There are two different approach In below 2 MCQ, in 1st MCQ its not consider treated as irrelevant and in 2nd MCQ its treated as relevant (cant ignore in decision making), please help to let me know if its otherwise.
MCQ1
Johnson Company manufactures a variety of shoes, and has received a special one-time-only order directly from a wholesaler. Johnson has sufficient idle capacity to accept the special order to manufacture 15,000 pairs of sneakers at a price of $7.50 per pair. Johnson's normal selling price is $11.50 per pair of sneakers. Variable manufacturing costs are $5.00 per pair and fixed manufacturing costs are $3.00 a pair. Johnson's variable selling expense for its normal line of sneakers is $1.00 per pair. What would the effect on Johnson's operating income be if the company accepted the special order?
| A |
Increase by $52,500.
|
| B |
Increase by $37,500.
|
| C |
Increase by $22,500.
|
| D |
Decrease by $60,000.
|
This Answer is Correct - B
If Johnson accepts the special order, they will gain $112,500 ($7.50 price multiplied by the 15,000 volume). The order will cost $75,000 ($5 variable manufacturing cost multiplied by the 15,000 volume).
Therefore, the increase in operating income is calculated as:
Increase in operating income = $112,500 − $75,000 = $37,500.
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Shridhar Shinde
Accountant
Mumbai
India
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