Question

Cornish Company had the following results of operations for the past year: Sales (20,000 units at $22) $ 440,000 Direct materials and direct labor $ 200,000 Overhead (40% variable) 100,000 Selling and administrative expenses (all fixed) 92,000 (392,000 ) Operating income $ 48,000 A foreign company (whose sales will not affect Cornish's market) offers to buy 3,000 units at $17.00 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $500 and selling and administrative costs by $1,000. If Cornish accepts the offer, its profits will:

Answer 1

Increase by $13,500

Step-by-step explanation:

Cornish Company

Selling price per unit$17.00

Variable costs per unit

Direct materials and direct labor($200,000/20,000 units)$10.00

Variable overhead[(40% * $100,000)/20,000 units]2.00

Total variable costs per unit($12.00)

Contribution margin per unit$5.00 Units in order* 3,000units

Total contribution margin$15,000

Less incremental fixed costs:

Overhead$500

Selling and administrative1,000

Total incremental fixed costs($1,500)

Incremental income from order$13, 500

Therefore If Cornish accepts the offer, its profits will increase by $13,500