Question: Pluto Incorporated provided the following information regarding its single product:

Direct materials used $240,000

Direct labor incurred $420,000

Variable manufacturing overhead $160,000

Fixed manufacturing overhead $100,000

Variable selling and administrative expenses $60,000

Fixed selling and administrative expenses $20,000

The regular selling price for the product is $80. The annual quantity of units produced and sold is 40,000 units (the costs above relate to the 40,000 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory.

What would be the effect on operating income of accepting a special order for 1,000 units at a sale price of $40 per product? Note: The special order units would not require any variable selling and administrative expenses.

Decrease by $19,500

Decrease by $18,000

Increase by $18,000

Increase by $19,500