Multiple choice. (CPA) Choose the best answer.
1. The Cozy Company manufactures slippers and sells them at $10 a pair. Variable manufacturing cost is $5.75 a pair, and allocated fixed manufacturing cost is $1.75 a pair. It has enough idle capacity available to accept a one-time-only special order of 25,000 pairs of slippers at $7.50 a pair. Cozy 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: (a) $0, (b) $43,750 increase, (c) $143,750 increase, or (d) $187,500 increase? Show your calculations.
2. The Manchester Company manufactures Part No. 498 for use in its production line. The manufacturing cost per unit for 10,000 units of Part No. 498 is as follows:
The Remnant Company has offered to sell 10,000 units of Part No. 498 to Manchester for $71 per unit. Manchester will make the decision to buy the part from Remnant if there is an overall savings of at least $45,000 for Manchester. If Manchester accepts Remnant’s offer, $11 per unit of the fixed overhead allocated would be eliminated. Furthermore, Manchester has determined that the released facilities could be used to save relevant costs in the manufacture of Part No. 575. For Manchester to achieve an overall savings of $45,000, 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 which of the following: (a) $30,000, (b) $115,000, (c) $125,000, or (d) $100,000? Show your calculations. What other factors might Manchester consider before outsourcing to Remnant?
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