Question

Crane Company manufactures a product with a unit variable cost of $100 and a unit sales price of $176. Fixed manufacturing costs were $480000 when 10000 units were produced and sold. The company has a one-time opportunity to sell an additional 1000 units at $115 each in a foreign market which would not affect its present sales.
If the company has sufficient capacity to produce the additional units, acceptance of the special order would affect net income as follows:


a. Income would decrease by $8,000.

b. Income would increase by $8,000.

c. Income would increase by $140,000.

d. Income would increase by $40,000.

e. None of the above.

Answer 1

Answer: e. None of the above

Explanation:

Fixed costs are already incurred so will no longer be a factor as the same facilities are to be used. .

Variable costs on the other hand will always be there as the company aims to produce more and more goods.

The increase in net income will therefore be;

= Sales revenue - Variable costs

= ( 1,000 * 115) - ( 1,000 * 100)

= $15,000

Income will increase by $15,000