Question

"Elkhorn, Inc., which has excess capacity, received a special order for 4,000 units at a price of $15 per unit. Currently, production and sales are anticipated to be 10,000 units without considering the special order. Budget information for the current year follows. Sales $ 190,000 Less: Cost of Goods Sold 145,000 Gross Margin $ 45,000 Cost of goods sold includes $30,000 of fix ed manufacturing cost. If the special order is accepted, the company's income will:"increase by $2,000.
decrease by $14,000.

decrease by $2,000.

increase by $14,000.

None of the answers is correct.

Answer 1

Answer:

Profit from sale of special order of 4,000 units increase by $14000

Explanation:

given data

order = 4000 units

Sales = $ 190,000  

Cost of Goods Sold = 45,000  

Gross Margin = $45,000

Sales price per unit = $15

solution

as we know that Elkhorn has excess capacity

so sales of 4000 additional units would not affect current sales of 10,000 units

and by production of excess 4000 units fixed cost would not increase

so Variable cost per unit will be

Variable cost per unit = $\frac{145000 - 30000}{10000}$

Variable cost per unit = $11.5

so

Profit per unit will be

Profit per unit = Sales price -  Variable cost

Profit per unit = $15 - $11.5

Profit per unit = $3.5

so

Profit from sale of special order of 4,000 units increase as  = 4000 × $3.5

Profit from sale of special order of 4,000 units increase by $14000