This is the difference between Johnson's normal selling price of $11.50 per pair and the special order price of $7.50 per pair, multiplied by 15,000 pairs. This answer assumes the company will have a loss equal to the amount of the discount on each pair of sneakers because it could have sold them for $11.50 instead of $7.50. That is not the case, because the company's facilities would be idle if it does not accept this order. In other words, it cannot sell these sneakers for $11.50. Thus there is no opportunity cost in accepting this order. Furthermore, the company's normal fixed costs and normal variable selling costs do not apply to this order. Fixed manufacturing costs are irrelevant, because they will be the same whether the order is accepted or not accepted. The variable selling expense for the normal line of sneakers is also irrelevant, because the company has already received the special order. Any selling expenses incurred in getting the order are sunk costs, and sunk costs are not relevant because they cannot be changed by the decision of whether or not to accept the order.
This answer results from including the $1.00 per unit variable selling expense for the normal line of sneakers as a cost of the order. The variable selling expense for the normal line of sneakers is irrelevant, because the company has already received the special order. Any selling expenses incurred in getting the order are sunk costs, and sunk costs are not relevant because they cannot be changed by the decision of whether or not to accept the order.
The incremental contribution margin per pair of sneakers is $7.50 selling price ? $5.00 variable cost, or $2.50. Fixed manufacturing costs are irrelevant, because they will be the same whether the order is accepted or not accepted. The variable selling expense for the normal line of sneakers is also irrelevant, because the company has already received the special order. Any selling expenses incurred in getting the order are sunk costs, and sunk costs are not relevant because they cannot be changed by the decision of whether or not to accept the order. Therefore, the effect on operating income if the company accepts the special order will be $2.50 × 15,000 pairs, or $37,500.
This is the special order price of $7.50 per unit minus the fixed cost per unit of $3.00 per pair minus the normal variable selling cost of $1.00 per pair, the difference multiplied by 15,000 units. This is incorrect because (1) fixed manufacturing costs are irrelevant, because they will be the same whether the order is accepted or not accepted; (2) the variable manufacturing cost per unit has not been taken into consideration; (3) The variable selling cost for the company's normal line of sneakers has been included. Selling expenses related to getting the special order are not relevant because they are sunk costs. Sunk costs are not relevant because they cannot be changed by the decision of whether or not to accept the order.
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