Question

Blue Spruce Manufacturing has an annual capacity of 80,200 units per year. Currently, the company is making and selling 78,000 units a year. The normal sales price is $102 per unit, variable costs are $65 per unit, and total fixed expenses are $2,000,000. An out-of-state distributor has offered to buy 5,500 units at $75 per unit. Blue Spruce's cost structure should not change as a result of this special orderBy how much will Marston's income change if the company accepts this order?

Answer 1

Answer:

The annual capacity is 85000 units. If order is accepted of 12000 units the company will be able to sell only 73000 units (instead of 78000).

Explanation:

Current Net Income calculation and New Net Income calculation are atteched in the archive.

• Increase in income = new income – old income = 370000 – 340000 = $30000

• Marston’s Net Income will INCREASE by $30,000 if it accepts the special order.

• The above increase can be also understood as---

Contribution gain on special order – 12000 units x ($105-$90) = $180,000

(-) Contribution lost of normal sale – (78000 units – 73000 units) x ($120-$90) = $150000

Net INCREASE = 180000 – 150000 = $30,000

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