Marsdon Company has an annual production capacity of 15,000 units. The costs ass
ID: 2482316 • Letter: M
Question
Marsdon Company has an annual production capacity of 15,000 units. The costs associated with production and sale of the company's product are given below:
Manufacturing costs:
Variable...................................................
$12
per unit
Fixed (annual cost)...................................
$90,000
Selling and administrative costs:
Variable (sales commissions).....................
$3
per unit
Fixed (annual cost)...................................
$60,000
The company presently is selling 12,000 units annually at a selling price of $28 each. A special order has been received from a distributor who wants to purchase 3,000 units at a special price of $20 each. Regular sales would not be affected by this order and the order could be filled without any impact on total fixed costs. Sales commissions on the special order would be reduced by one-third.
Required:
Determine whether the company should accept the special order.
Manufacturing costs:
Variable...................................................
$12
per unit
Fixed (annual cost)...................................
$90,000
Selling and administrative costs:
Variable (sales commissions).....................
$3
per unit
Fixed (annual cost)...................................
$60,000
Explanation / Answer
Current Scenario $ Sales of 12,000 Units @ $28 each 336000 Variable Manufacturing Costs @ $12 each -144000 Variable Selling Costs @ $3 each -36000 Fixed costs -150000 Net Income earned 6000 Revised Scenario Sales of 12,000 units @ $28 each 336000 Sales of 3,000 units @ $20 each 60000 Variable Manufacturing Costs @ $12 each -180000 Variable Selling Costs @ $2 each (reduction by one-third) -30000 Fixed Costs -150000 Net Income Earned 36000 Since the total net income earned when the order is accepted increases by $ 30,000, Mardson Company should accept the order.
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