1. The Woody Company manufactures slippers and sells them at $10 a pair. Variable manufacturing cost is $4.50 a pair, and allocated fixed manufacturing cost is $1.50 a pair. It has enough idle capacity available to accept a one-time-only special order of 20,000 pairs of slippers at $6 a pair. Woody will not incur any marketing costs as a result of the special order. What would the effect on operating income be if the special order could be accepted without affecting normal sales?
(b) $30,000 increase,
(c) $90,000 Increase or
(d) $120,000 increases show your calculations.
2. The Reno Company manufactures Part No. 498 for use in its production line. The manufacturing cost per unit for 20,000 units of Part No. 498 is as follows:
The Tray Company has offered to sell 20,000 units of Part No. 498 to Reno for $60 per unit. Reno will make the decision to buy the part from Tray if there is an overall savings of at least $25,000 for Reno. If Reno accepts Tray’s offer, $9 per unit of the fixed overhead allocated would be eliminated. Furthermore, Reno has determined that the released facilities could be used to save relevant costs in the manufacture of Part No. 575. For Reno to achieve an overall savings of $25,000, the amount of relevant costs that would have to be saved by using the released facilities in the manufacture of Part No. 575 would be
(c) $125,000, or
(d) $140,000 show yourcalculations.