Termus Industries is operating at 85% of its manufacturing capacity of 50,000 pr

Question

Termus Industries is operating at 85% of its manufacturing capacity of 50,000 product units per year. A customer has offered to buy an additional 4,000 units at $25 each and sell them outside the country so as not to compete with Termus. The following data are available:
Costs at 85% Capacity. Per Unit. Total
Direct materials $10.00 $425,000
Direct labor 8.00 340,000
Overhead (fixed and variable) 13.00 552.500
Totals $31.00 $1,317,500

In producing 4,000 additional units, fixed overhead costs would remain at their current level but incremental variable overhead costs of $4 per unit would be incurred. What is the effect on income if Termus accepts this order?
Income will decrease by $6 per unit.
Income will increase by $6 per unit.
Income will increase by $7 per unit.
Income will decrease by $3 per unit.
Income will increase by $3 per unit.

Explanation / Answer

25 sales price -10 DM -8 DL -4 VOH =3 Answer: Income will increase by $3 per unit

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