Peters Company produces a product with the following unit cost. Fixed selling co

Question

Peters Company produces a product with the following unit cost.

Fixed selling costs are $600,000 per year and variable selling costs are $1.50 per unit sold.

Production capacity is 500,000 units per year. However, the company expects to produce only 300,000 units next year. The product normally sells for $15 each. A customer has offered to buy 150,000 units for $10 each. The units would be sold in an area outside the market area currently served.

Q. Total incremental costs associated with the special order is?

a) $1,237,500

b) $1,342,000

c) $1,387,500

d) $1,425,000

Q. If the firm produces the special order, the effect on income would be?e

a) $75,000 increase

b) $90,000 increase

c) $2,500 decrease

d) $12,500 decrease

Can you please explain how to get the answer, thank you.

Direct Materials $2.75 Direct Labour $1.25 Variable Overhead $4.00 Fixed Overhead $2.50 Unit Cost $10.50

Explanation / Answer

TOTAL INCREMENTAL COSTS: It includes are variable expenses. Total incremental costs = 150000 units*(2.75+1.25+4+1.5) = $   1,425,000 Answer: Option [d] EFFECT ON INCOME: Incremental sales revenue = 150000 units *$10 = $   1,500,000 Incremental variable expenses = 150000 units * (2.75+1.25+4+1.5) $   1,425,000 Increase in income $         75,000 Answer: Option [a]

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