Seville Company manufactures a product with a unit variable cost of $42 and a un

Question

Seville Company manufactures a product with a unit variable cost of $42 and a unit sales price of $75. Fixed manufacturing costs were $80,000 when 10,000 units were produced and sold, equating to $8 per unit. The company has a one-time opportunity to sell an additional 1,500 units at $55 each in an international market which would not affect its present sales. The company has sufficient capacity to produce the additional units. How much is the relevant income effect of accepting the special order?

Explanation / Answer

when 10,000 units were produced and sold

Sale price = $75

Variable cost = $42

Fixed cost = $8

Income = $25 per unit

one-time opportunity to sell an additional 1,500 units at $55 each in an international market

Sale price = $55

variable cost = $42

Income = $13 per unit

Total relevant income = $13*1500 = 67600

Fixed cost is not relevant in decision making, as it will continue to be incurr irrespective of special order, hence ignored

If special order is accepted, then income will increase by $67600

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