Question

Merry Toy Company makes toy airplanes. One plane is an excellent replica of the Boeing 737; it sells for $8. Joyous Airlines wants to purchase 15,000 planes at $4 each to give to children flying unaccompanied. Costs per plane are as follows: Direct materials $1.25 Direct labor 2.05 Variable manufacturing overhead 0.50 Variable marketing 0.10 Fixed overhead 0.70 No variable marketing costs would be incurred for the special order. The company is operating significantly below the maximum productive capacity. No fixed costs are avoidable. However, Joyous Airlines wants its own logo and colors on the planes. The cost of the decals is $0.05 per plane, and a special machine costing $2,000 would be required to affix the decals. After the order is complete, the machine would be scrapped. Should the special order be accepted?
a. No, income will decrease by $200.
b. No, income will decrease by $2,500.
c. Yes, income will increase by $250.
d. Yes, income will increase by $600.
e. It doesn't matter; there will be no change in income.

Answer 1

Answer:

C) Yes, income will increase by $250.

Explanation:

normal selling price $8

special order for 15,000 at $4 each

incremental costs per plane:

• direct materials $1.25
• direct labor $2.05
• variable manufacturing overhead $0.50
• decals $0.05
• total $3.85 per plane

plus $2,000 in special machine

gain/loss resulting from special order = total revenue - incremental costs per plane - special machine = ($4 x 15,000) - ($3.85 x 15,000) - $2,000 = $60,000 - $57,750 - $2,000 = $250

net profits will increase by $250