Question

Markson Company had the following results of operations for the past year: Sales (8,000 units at $20) $ 160,000 Variable manufacturing costs $ 86,000 Fixed manufacturing costs 15,000 Variable administrative expenses 12,000 Fixed selling and administrative expenses 20,000 (133,000 ) Operating income $ 27,000 A foreign company offers to buy 2,000 units at $14 per unit. In addition to variable manufacturing and administrative costs, selling these units would increase fixed overhead by $1,600 for the purchase of special tools. Markson’s annual productive capacity is 12,000 units. If Markson accepts this additional business, its profits will:

Answer 1

Answer:

Increase in profit   $ 1900

Explanation:

To determine the additional profit from the special order, we would consider only the costs and revenue relevant to the special order decision:

Unit relevant cost = Total variable cost/Units produced

Total variable costs = 86,000 + 12,000 =$98000

Unit relevant cost = 98,000/8,000 = $12.25

Note that fixed costs are irrelevant, whether or not the special order is accepted the fixed manufacturing and administrative expenses would be incurred. Hence, they are excluded from the computation.

                                                                                                         $

Revenue from the special order ( $14× 2,000)  =                        28,000

Relevant costs of special order ( $12.25 × 2,000)                    (24,500)

Cost of special tools                                                                     (1,600)

Increase in profit                                                                              1900