Question

S'Round Sound, Inc. reported the following results from the sale of 24,000 units of IT-54:

Sales $528,000
Variable manufacturing costs 288,000
Fixed manufacturing costs 120,000
Variable selling costs 52,800
Fixed administrative costs 35,200

Rhythm Company has offered to purchase 3,000 IT-54s at $16 each. Sound has available capacity, and the president is in favor of accepting the order. She feels it would be profitable because no variable selling costs will be incurred. The plant manager is opposed because the "full cost" of production is $17.

Which of the following correctly notes the change in income if the special order is accepted?

$3,000 decrease.
$3,000 increase.
$12,000 decrease.
$12,000 increase.
None of these.

Answer 1

Answer:

The correct answer is D.

Explanation:

Giving the following information:

Total Variable manufacturing costs 288,000

Unitary variable costs= 288,000/24,000= $12

Rhythm Company has offered to purchase 3,000 IT-54s at $16 each. No variable selling costs will be incurred.

Because it is a special offer and there is available capacity, we will not have into account the fixed costs.

Effect on income= 3,000*(16-12)= $12,000 increase