Rom Company produced and sold 50,000 units of product and is operating at 80% of
ID: 2381787 • Letter: R
Question
Rom Company produced and sold 50,000 units of product and is operating at 80% of plant capacity. Unit information about its product is as follows:
Sales Price $68
Variable manufacturing cost $42
Fixed manufacturing cost ($600,000
Rom Company produced and sold 50,000 units of product and is operating at 80% of plant capacity. Unit information about its product is as follows: Sales Price $68 Variable manufacturing cost $42 Fixed manufacturing cost ($600,000 50,000) 12 54 Profit per unit $14 The company received a proposal from Madigan Company to buy 10,000 units of North Company's product for $49 per unit. This is a one-time only order and acceptance of this proposal will not affect the company's regular sales. The president of North Company is reluctant to accept the proposal because he is concerned that the company will lose money on the special order. Instructions Prepare a schedule reflecting an incremental analysis of this proposal and indicate the effect the acceptance of this order might have on the company's income.Explanation / Answer
10000 ADDITIONAL UNITS ARE MADE BY THE COMPANY ITSELF
SALES (60000*68) = 4080000
LESS:- VARRIABLE COST(60000*42) = 2520000
LESS:FIXED COST = 600000
NET INCOME = 960000
NOW IF COMPANY BUYS ADDITIONAL UNITS FROM MADIGAN COMPANY
SALES(60000*68)= 4080000
LESS: VARIABLE COST [(50000*42)+(10000*49)] = 2590000
LESS: FIXED COST = 600000
NET INCOME = 890000
IF THE OFFER IS ACCEPTED BY THE COMPANY ITS NET INCOME WOULD FALL FROM $960000 TP $890000
i.e FALL IN NET INCOME OF $70000
70000/960000 * 100 = 7.29%
i.e. FALL IN NET INCOME BY 7.29%
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