Question

Dakota Company has been producing and selling 42,000 hats a year. There are no beginning and ending inventories. The Dakota Corporation has the capacity to produce 52,000 hats. The following data is available:
Selling price per unit $30
Variable manufacturing costs per unit $13
Variable selling and administrative costs per unit $7
Total fixed manufacturing costs $126,000
Total fixed selling and administrative costs $84,000

If a special order is accepted for 10,000 hats at a price of $25 per unit, net income would ________.

A) increase by $20,000
B) increase by $50,000
C) increase by $90,000
D) decrease by $24,000

Answer 1

Answer:

B) increase by $50,000

Explanation:

The computation of the incremental revenue is shown below:

= Number of units accepted in case of special order × price per unit - variable manufacturing cost - variable selling and administrative cost

= 10,000 units × $25 - $130,000 - $70,000

= $250,000 - $130,000 - $70,000

= $50,000

The variable manufacturing cost is

= 10,000 units  × $13

= $130,000

And, the Variable selling and administrative costs is

= 10,000 units  × $7

= $70,000