Question

It costs Sheridan Company $28 of variable costs and $17 of allocated fixed costs to produce an industrial trash can that sells for $84. A buyer in Mexico offers to purchase 3000 units at $34 each. Sheridan Company has excess capacity and can handle the additional production. What effect will acceptance of the offer have on net income? Increase $102000 Increase $33000 Increase $18000 Decrease $33000

Answer 1

Answer:

Option (C) is correct.

Explanation:

Variable costs = $28

Allocated fixed costs = $17

Selling price = $84

Due to acceptance of M offer, S would be got excess contribution margin per unit. Because acceptance selling price ($34) is greater than the variable cost per unit ($28).

We don't have any information about the fixed cost due to acceptance. Therefore, we assumed that fixed cost is not increased.

Increased contribution margin per unit:

= Selling price - Variable cost

= $34 - $28

= $6

For 3,000 units, Increased contribution margin = 3,000 × $6

                                                                               = $18,000

Therefore, net income is increased by $18,000 when the offer is accepted.