Question

Vivian Industries manufactures a product with a normal selling price of $56 per unit. The product costs $36 per unit to manufacture, with variable costs of $28 per unit and fixed overhead costs of $8 per unit. Vivian has been approached by a buyer wishing to purchase 5,000 units for $32 per unit. Vivian has plenty of capacity to fill the special order without impacting current sales. By how much will Vivian's revenue and expenses increase due to the special order?

A
$160,000 increase in revenue; $140,000 increase in expenses
B
$160,000 increase in revenue; $180,000 increase in expenses
C
$280,000 increase in revenue; $180,000 increase in expenses
D
$280,000 increase in revenue; $140,000 increase in expenses

Answer 1

The revenue will increase by $160,000 and the expenses will increase by $140,000 due to the special order.

Step-by-step explanation:

To calculate the change in revenue and expenses due to the special order, we need to compare the current selling price and costs with the selling price and costs of the special order.

Current selling price: $56 per unit
Current variable costs: $28 per unit
Current fixed overhead costs: $8 per unit

Selling price of special order: $32 per unit
Variable costs of special order: $28 per unit
Fixed overhead costs of special order: $8 per unit

To calculate the increase in revenue, we subtract the total revenue from the special order from the total revenue from the current sales:
($32 per unit x 5,000 units) - ($56 per unit x 5,000 units) = $160,000 increase in revenue

To calculate the increase in expenses, we subtract the total expenses from the special order from the total expenses from the current sales:
($28 per unit x 5,000 units) + ($8 per unit x 5,000 units) - ($36 per unit x 5,000 units) = $140,000 increase in expenses