Question

Baden Company manufactures a product with a unit variable cost of $100 and a unit sales price of $176. Fixed manufacturing costs were $480,000 when 10,000 units were produced and sold. The company has a one-time opportunity to sell an additional 1,000 units at $140 each in a foreign market which would not affect its present sales. If the company has sufficient capacity to produce the additional units, acceptance of the special order would affect net income as follows.

a. Income would decrease by $8,000.

b. Income would increase by $8,000.

c. Income would increase by $140,000.

d. Income would increase by $40,000.

Answer 1

Answer:

Option d is correct

Increase in income        $40,000

Explanation:

                                                                                           $

Sales revenue from Order = (140× 1,000)=                  140,000

Variable cost of order ( 100× 1,000)   =                        (100,000)  

Increase in income                                                        40,000

Note that the fixed costs of $480,000 was not include in the analysis. This is is so because it would be still incurred whether the order is accepted or not. Hence, it is irrelevant for this decision.