Davis Company normally produces 150,000 units of Product AB per year. Due to an economic
downturn, the company has some idle capacity. Product AB sells for $15 per unit.
The firm's production, marketing, and administration costs at its normal capacity are:
Per Unit
Direct material $1.00
Direct labor 2.00
Variable overhead 1.50
Fixed overhead
($450,000/150,000 units) 3.00
Variable marketing costs 1.05
Fixed marketing and administrative costs
($210,000/150,000 units) 1.40
Total $9.95
Compute the firm's operating income before income taxes if the firm produced and sold 110,000 units.
