Manganese Company Makes Frames

question 131

Multiple Choice

Manganese Company makes frames.A customer wants to place a special order for 750 frames in green with the company logo painted on the frame, to be priced at $60 each.Normally, Manganese would charge $100 per frame for this type of order.Manganese figures that wood and glass will cost $20 per frame, variable overhead (machining, electricity) is $5 per frame, direct labor is $10 per frame, and one setup will be required at $1,500 per setup.The set-up charge costs are 100% labor.Currently, the workers needed to set up for and make the frames are working at Manganese.Their wages will be paid whether or not the special order is accepted.Manganese's policy is to avoid layoffs to the extent possible. If Manganese accepts the special order, by how much will operating income increase or decrease?

• A) $16,660 increase
• B) $40,000 decrease
• C) $26,250 increase
• D) $30,000 increase
• E) There will be no effect on operating income.

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Definitions:

Service Shops

Businesses that provide professional or technical services rather than products, often requiring specialized labor or skills.

Mass Services

Services provided on a large scale to a broad population where individual customer interactions are relatively uniform and low in complexity.

Process Costing

A costing method used in industries where production is continuous, assigning costs to units of output on the basis of average costs for each process or department.

Labour

Labour refers to human work effort, both physical and mental, used in the production of goods and services.