Peters Company produces a product with the following unit cost.
Fixed selling costs are $600,000 per year and variable selling costs are $1.50 per unit sold.
Production capacity is 500,000 units per year. However, the company expects to produce only 300,000 units next year. The product normally sells for $15 each. A customer has offered to buy 150,000 units for $10 each. The units would be sold in an area outside the market area currently served.
-If the firm produces the special order, the effect on income would be
A) $75,000 increase.
B) $90,000 increase.
C) $2,500 decrease.
D) $12,500 decrease.

Question

Peters Company produces a product with the following unit cost.
  Fixed selling costs are $600,000 per year and variable selling costs are $1.50 per unit sold.
Production capacity is 500,000 units per year. However, the company expects to produce only 300,000 units next year. The product normally sells for $15 each. A customer has offered to buy 150,000 units for $10 each. The units would be sold in an area outside the market area currently served.
-If the firm produces the special order, the effect on income would be
A) $75,000 increase. 
B) $90,000 increase. 
C) $2,500 decrease. 
D) $12,500 decrease.

Quizplus · Accepted Answer

The special order increases income by $75,000, as it likely covers variable costs and contributes to fixed costs and profit.

Peters Company Produces a Product with the Following Unit Cost