Question

CoolAir Corporation manufactures window air conditioners. CoolAir has the capacity to manufacture and sell 80,000 air conditioners each year but is currently only manufacturing and selling 60,000. The following unit cost data relate to annual operations at 60.000 units: Selling price $125 Variable manufacturing $25 cost Fixed manufacturing $40 cost Variable selling and administrative cost Fixed selling and administrative cost $10 $15 The City of Clearwater would like to purchase 3,000 air conditioners from CoolAir but only if they can buy them for $75 each. Variable selling and administrative costs on this special order would decrease to $2 per unit if CoolAir accepted the order. This order would not affect the 60,000 units of regular sales and would not affect total fixed costs. The annual financial advantage (disadvantage) for CoolAir of accepting this special order from the City of Clearwater would be: a. $21,000 b. $24,000 c. $144,000 d. $129.000e. None of the above

Answer 1

Answer:

c. $144,000

Explanation:

Consider the Incremental Costs and Revenues. Fixed Costs are irrelevant for this decision since they do not change within the operating range of 60,000.

Analysis of Incremental Costs and Revenues

Sales (3,000×$75)                                                     225,000

Variable manufacturing ( 3,000×$25)                       (75,000)

Variable selling and administrative (3,000×$2)         (6,000)

Net Income                                                                 144,000

Conclusion

An incremental net income of $144,000 will result from accepting the special order.