Question

eggie Corporation manufactures a single product with the following unit costs for 1,000 units: Direct materials $2,400 Direct labor 960 Overhead (30% variable) 1,800 Selling expenses (50% variable) 900 Administrative expenses (10% variable) 840 Total per unit $6,900 Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each. Currently, the models are sold to dealers for $7,800. Reggie Corporation's capacity is sufficient to produce the extra 100 units. No additional selling expenses would be incurred on the special order. How much will income change if the special order is accepted

Answer 1

If the special order is accepted, the income will change by $270,000.

Step-by-step explanation:

If the special order is accepted, the income will change by a specific amount. To calculate the change in income, we need to compare the income generated from the special order with the income generated from the regular sales. Currently, the models are sold to dealers for $7,800 each. If we sell 100 units at $7,800 each, the total revenue would be $780,000. On the other hand, if we sell 100 units at $5,100 each for the special order, the total revenue would be $510,000. Therefore, the change in income would be $780,000 - $510,000 = $270,000.

Answer 2

Accepting the special order would result in an additional income of $111,600 for Reggie Corporation, after accounting for the incremental costs associated with producing the extra units offered at a special price.

Step-by-step explanation:

To calculate the change in income if Reggie Corporation accepts the special order, we need to consider the additional revenues and the incremental costs of producing the extra 100 units. The special order offers a price of $5,100 per unit. Since no additional selling expenses will be incurred, we only need to account for variable costs which are variable overhead, variable administrative expenses, direct materials, and direct labor.

Let's break down the variable and fixed costs per unit:

Variable overhead: 30% of $1,800 = $540

Variable selling expenses: 50% already excluded as no additional will be incurred

Variable administrative expenses: 10% of $840 = $84

Direct materials = $2,400

Direct labor = $960

Now let's calculate the total variable cost per unit: $540 + $84 + $2,400 + $960 = $3,984

The additional revenue from the special order is $5,100 x 100 units = $510,000.
The additional cost for producing the 100 units is: $3,984 (cost per unit) x 100 units = $398,400.
The change in income will be the additional revenue minus the additional costs: $510,000 - $398,400 = $111,600.

Therefore, if Reggie Corporation accepts the special order, the change in income will be a positive $111,600.