14. Montoya Enterprises produces a sword that sells for $200. Although the compa
ID: 2542436 • Letter: 1
Question
14. Montoya Enterprises produces a sword that sells for $200. Although the company's production capacity is 3,400 swords per year, only 2,500 swords are currently being produced and sold. Humperdinck Corporation has offered to purchase 500 swords as a one-time special purchase at a price of $160 per sword. If the special order is accepted, Montoya Enterprises will have to incur additional fixed costs of $1,500 due to additional set-ups.
At Montoya’s current level of production (2,500 swords), the Montoya Enterprises incurs the following costs:
Direct materials $220,000
Direct labor $100,000
Variable factory overhead $ 60,000
Fixed factory overhead $ 70,000
What will be the impact on Montoya’s Enterprises’ income if the special order is accepted?
Explanation / Answer
Answer:-Current operating income:-Sales-Variable costs -fixed costs
=(2500 swords*$200 per sword)-($200000+$100000+$60000+$70000)
=$500000-$430000 = $70000
Total production capacity=3400 swords per year
Current used capacity =2500 swords
Spare capacity =3400-2500 =900 swords
Offer from Humperdinck corporation to purchase =500 swords
Offer price =$160 per sword
Additional set cost (fixed cost) due to offer =$1500
Incremental income from special offer =(Offer price-Variable cost per unit)*500 swords-Additional fixed costs
=[$160 per sword –($220000+$100000+$60000)/2500 swords}*500 swords-$1500
=($160 per sword-$152 per sword) *500 swords-$1500
=$4000-$1500
=$2500
The income of Montoya’s Enterprises will increase by $2500
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