Memory Division of Missing Byte, Inc. The Memory Division of Missing Byte, Inc. produces a high-quality computer chip. Unit production costs (based on capacity production of 100,000 units per year) follow:
Refer to Memory Division of Missing Byte, Inc. Assume, for this question only, that the Memory Division is presently operating at a level of 80,000 chips per year. Accepting a "special order" on 2,000 chips at $88 will
A) increase total corporate profits by $4,000.
B) increase total corporate profits by $20,000.
C) decrease total corporate profits by $14,000.
D) decrease total corporate profits by $24,000.

Question

Memory Division of Missing Byte, Inc. The Memory Division of Missing Byte, Inc. produces a high-quality computer chip. Unit production costs (based on capacity production of 100,000 units per year) follow:
 Refer to Memory Division of Missing Byte, Inc. Assume, for this question only, that the Memory Division is presently operating at a level of 80,000 chips per year. Accepting a "special order" on 2,000 chips at $88 will
A) increase total corporate profits by $4,000. 
B) increase total corporate profits by $20,000. 
C) decrease total corporate profits by $14,000. 
D) decrease total corporate profits by $24,000.

Quizplus · Accepted Answer

The total cost of producing 80,000 chips is $7,840,000 (80,000 units x $98 unit cost). 
If the company accepts a special order for 2,000 chips at $88, the additional revenue would be $176,000 (2,000 units x $88 unit price). 
The cost of producing these additional 2,000 chips would be $176,000 x 0.75 (based on the 75% capacity utilization) = $132,000. 
Therefore, the net profit from accepting the special order would be $44,000 ($176,000 - $132,000). 
Since this is an additional profit, it would increase the total corporate profits by $20,000 (2,000 units x $10 profit per unit).