Question

Tarazz company manufactures computers. The following cost information for the manufacture of one computer has been compiled. Direct materials: 48, Direct labor:64, Variable manufacturing overhead: 48, Fixed manufacturing overhead:32. Total cost per unit: 192. Tarazz has received a special order for 500 computers at a price of175 per unit. By how much will overall company net income change if the order is accepted?

1) Company net income will increase by $8,500 if the order is accepted.
2) Company net income will increase by $7,500 if the order is accepted.
3) Company net income will decrease by $7,500 if the order is accepted.
4) Company net income will decrease by $8,500 if the order is accepted.

Answer 1

If Tarazz company accepts the special order for 500 computers at $175 each, the net income will increase by $7,500. This calculation considers only the variable costs of production since fixed manufacturing overhead remains constant irrespective of the order.

Step-by-step explanation:

Tarazz company is considering a special order for its computers, and we need to determine the impact on the company's net income if the order is accepted. The special order offers a price of $175 per unit for 500 units, while the total cost per unit of production is $192. To calculate the change in net income, we consider the direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead costs per unit. Fixed costs will not change with the order, so only variable costs are considered when evaluating the order.

The variable cost per unit is the sum of the direct materials, direct labor, and variable manufacturing overhead, which totals to $48 + $64 + $48 = $160. Since fixed manufacturing overhead is not affected by the order, we ignore it for the marginal analysis. We multiply the variable cost per unit by the number of units in the order to get the total variable cost for the order: $160 * 500 = $80,000.

Next, we calculate the total revenue from the special order by multiplying the offer price by the number of units: $175 * 500 = $87,500. To find the impact on net income, we subtract the total variable costs from the total revenue: $87,500 (revenue) - $80,000 (cost) = $7,500. Hence, the company net income will increase by $7,500 if the order is accepted.