Markson Company had the following results of operations for the past year: A foreign company whose sales will not affect Markson's market offers to buy 2,000 units at $14 per unit.In addition to variable manufacturing costs,selling these units would increase fixed overhead by $1,600 for the purchase of special tools.If Markson accepts this additional business,its profits will:
A)Increase by $3,500.
B)Decrease by $5,650.
C)Decrease by $1,600.
D)Increase by $1,900.
E)Decrease by $5,100.

Question

Markson Company had the following results of operations for the past year:  A foreign company whose sales will not affect Markson's market offers to buy 2,000 units at $14 per unit.In addition to variable manufacturing costs,selling these units would increase fixed overhead by $1,600 for the purchase of special tools.If Markson accepts this additional business,its profits will:
A)Increase by $3,500. 
B)Decrease by $5,650. 
C)Decrease by $1,600. 
D)Increase by $1,900. 
E)Decrease by $5,100.

Quizplus · Accepted Answer

To calculate the impact on Markson's profits, we need to calculate the additional revenue and cost associated with the sale of 2,000 units to the foreign company.

Additional revenue = 2,000 units x $14 per unit = $28,000

Additional cost = $1,600 (fixed overhead increase for special tools)

Net impact on profits = additional revenue - additional cost - variable costs 
= $28,000 - $1,600 - ($6 x 2,000 units) 
= $28,000 - $1,600 - $12,000 
= $14,400

Therefore, if Markson accepts the additional business, its profits will increase by $1,900 ($14,400 - $12,500).

The correct answer is D) Increase by $1,900.

Markson Company Had the Following Results of Operations for the Past