Question

Snider, Inc., which has excess capacity, received a special order for 4,000 units at a price of $15 per unit. Currently, production and sales are anticipated to be 10,000 units without considering the special order. Budget information for the current year follows. Sales $190,000 Cost of goods sold 145,000 Gross margin 45,000 Cost of goods sold includes $30,000 of fixed manufacturing cost. If the special order is accepted, the company's income will:

Answer 1

$54,000

Step-by-step explanation:

If the special order is accepted, Snider, the only cost to consider by Inc. is the variable cost that is avoidable if the order is not accepted.

The fixed cost will not be considered because it has already being incurred as part of the excess capacity and therefore no longer avoidable.

The amount amount by which the income of the company is therefore the difference between the total revenue of the special order minus its variable cost. This can be calculated as follows:

Total revenue of the special order = 4,000 * $15 = $60,000

Company's variable cost per unit = (Cost of goods sold - Fixed manufacturing cost) / Units without special order = ($45,000 - $30,000) / 10,000 = $15,000 / 10,000 = $1.50

Total variable cost of the special order = Company's variable cost per unit * Units of special order = 4,000 * $1.5 = $6,000

Income from the special order = $60,000 - $6,000 = $54,000

Therefore, if the special order is accepted, the company's income will increase by $54,000.