Question

12. Bania’s Soup Company is considering accepting a special order for its soup. The normal sales price of a case of soup is $22 and the variable cost per case of soup is $17. Bania’s total fixed costs are $10,000, which is equivalent to $5 per case. Normal volume is 2,000 cases of soup. The relevant range is 1,000 – 4,000 cases. The company has received a special order for 200 cases of soup at a price of $19 per case. If they accept the order: A. Their profits will increase by $3,800 B. Their profits will decrease by $600 C. Their profits will decrease by $1,400 D. Their profits will increase by $400

Answer 1

Answer:

Their profits will increase by $400

Explanation:

Consider the incremental costs and revenues arising from the special order

Note : Fixed costs are irrelevant for this decision because the special order is being accepted within the relevant range.

Analysis of incremental costs and revenues

Sales (200 cases×$19)                           $3,800

Variable Cost (200 cases×$17)              $3,400

Net Income / (loss)                                    $400

Result : Their profits will increase by $400