Australia Company manufactures sonars for fishing boats. Model 70 sells for $260
ID: 2563052 • Letter: A
Question
Australia Company manufactures sonars for fishing boats. Model 70 sells for $260. Australia produces and sells 5,600 of them per year. Cost data are as follows:
Variable manufacturing
$110
per unit
Variable selling and administrative
$15
per unit
Fixed manufacturing
$280,000
per year
Fixed selling and administrative
$160,000
per year
A potential deal has come up for a one-time sale of 32 units at a special price of $115 per unit. The marketing manager states that the sale will not negatively impact the company's regular sales activities and will require the normal variable manufacturing costs and selling and administrative costs. The production manager states that there is plenty of excess capacity and the deal will not impact fixed costs. The controller points out, however, that because the expected increase in revenues are equal to the expected increase in costs to fill the order, the deal will not have any impact on the bottom line. The controller is correct in his statement.
Variable manufacturing
$110
per unit
Variable selling and administrative
$15
per unit
Fixed manufacturing
$280,000
per year
Fixed selling and administrative
$160,000
per year
Explanation / Answer
Per unit 32 units Incremental revenue 115 3680 Less: Incremental costs Variable manufacturing 110 3520 Variable selling and administrative 15 480 Incremental income(loss) -320 The special order will decrease company's income by $320 The controller is not correct in his statement
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