Reference no: EM132530788

The following are the Warren Company's unit costs of making and selling an item at a volume of 10,000 units per month (which represents the company's capacity):

Manufacturing:

Direct materials$1.00

Direct labor$2.00

Variable overhead$0.50

Fixed overhead$0.90

Selling and administrative:

Variable $1.50 Fixed$0.60

• An order has been received from a customer in a foreign market for 1,000 units at $6 per unit. Fixed costs, both manufacturing and selling and administrative are constant within the relevant range between 8,000 and 10,000 units per month. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume direct labor is a variable cost.

Question 1: Suppose the Warren company sells its units at $10 and normal sales are 9,500. Should Warren company accept the special order?

Option A. Yes, because operating income will increase by $2,500

Option B. Yes, because operating income will increase by $1,500

Option C. No, because operating income will decrease by $1,500

Option D. No, because operating income will decrease by $2,500