Swifty Corporation manufactures a product with a unit variable cost of $100 and
ID: 2561379 • Letter: S
Question
Swifty Corporation manufactures a product with a unit variable cost of $100 and a unit sales price of $166. Fixed manufacturing costs were $480000 when 10000 units were produced and sold. The company has a one-time opportunity to sell an additional 1000 units at $125 each in a foreign market which would not affect its present sales. If the company has sufficient capacity to produce the additional units, acceptance of the special order would affect net income as follows: Income would increase by $25000 Income would decrease by $23000 Income would increase by $125000 Income would increase by $23000.Explanation / Answer
Answer is A.
Swifty Corporation received a special order to sell 1,000 units at $125 each.
Incremental Sales Revenue = 1,000 * $125
Incremental Sales Revenue = $125,000
Variable Cost per unit is $100 and fixed manufacturing cost is $480,000.
To produce required additional units, there will be no change in fixed manufacturing costs. So, cost to produce additional units will change on account of variable manufacturing cost only.
Incremental Cost = $100 * 1,000
Incremental Cost = $100,000
Incremental Net Income = Incremental Sales Revenue - Incremental Cost
Incremental Net Income = $125,000 - $100,000
Incremental Net Income = $25,000
So, company will earn $25,000 if it accept this special order.
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