Question

Rylan Corporation received an offer from an exporter for 25,000 units of product at $16 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: Domestic unit sales price $22 Unit manufacturing costs: Variable 11 Fixed 6 What is the differential cost from the acceptance of the offer? a.$275,000 b.$550,000 c.$150,000 d.$125,000

Answer 1

Answer: a.$275,000

Explanation:

Let us assume local production sales of 0 for simplicity of analysis.

At 0 there will be no Variable Costs and no fixed costs because they are dependant on the amount of units produced.

If then Rylan Corporation receives 25,000 units at $16 per unit this will change the Variable costs as it will have to incorporate the new units.

The question however says that normal production continues. This means that Fixed costs do not change. That means fixed costs remain at $0.

That means the only change will be the Variable costs of selling 25,000 units.

At a rate of $11 per unit we then have,

= 11 * 25,000

= $275,000

The costs have increased by $275,000 from 0 which means that $275,000 is the Incremental cost.

Note that Fixed and Variable costs of 0 are improbable and we're only used for simpler analysis. Feel free to try the question with other number of units for your own practice. You will arrive at the same answer regardless.