Question

Elkhorn, 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
Less: 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:

increase by $2,000.

decrease by $14,000.

decrease by $2,000.

increase by $14,000.

None of the answers is correct.

Answer 1

Answer:

The company's income will increase by $14,000.

Explanation:

Cost of goods sold per unit excludes fixed manufacturing cost:  

($145,000 - $30,000)/10,000 = $11.5

If the special order is accepted:

Sales revenue of the special order = 4,000 x $15 = $60,000

Cost of good sold of the special order = 4,000 x $11.5 = $46,000

Fixed manufacturing cost does not change after  the special order is accepted.

Income from the special order = $60,000 - $46,000 = $14,000

The company's income will increase by $14,000.