The following information relates to the Magna Company for the upcoming year, based on 402,000 units. Amount Per Unit Sales $ 11,256,000 $ 28.00 Cost of goods sold 6,834,000 17.00 Gross margin 4,422,000 11.00 Operating expenses 482,400 1.20 Operating profits $ 3,939,600 $ 9.80 The cost of goods sold includes $1,380,000 of fixed manufacturing overhead; the operating expenses include $118,000 of fixed marketing expenses. A special order offering to buy 68,000 units for $16.95 per unit has been made to Magna. Fortunately, there will be no additional operating expenses associated with the order and Magna has sufficient capacity to handle the order. How much will operating profits be increased if Magna accepts the special order?

Incremental income is $ 229,840

Explanation:

Computation of additional income

Incremental Revenues from the order 68,000 units at $ 16.95    $ 1,152,600

Cost of Goods sold

Existing Cost of Goods sold                      $ 6.834,000

Less: Fixed Manufacturing overhead       $  1,380,000  

Variable cost of goods sold                      $ 5,454,000

Existing production units                                  402,000

Variable Cost of goods sold per unit                 13.57 per unit

Incremental cost of goods sold    68,000 * $ 13,57                        $  922.760

Incremental income                                                                           $ 229,840

No increase is considered in fixed manufacturing overhead since it is fixed and sufficient capacity is available for the order. No incremental operating expenses is also envisaged as per then info in the question

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