Minnesota Inc.provided the following information regarding its only product--scissors: $\begin{array}{lr}
\text { Fixed manufacturing costs } & \$ 425,000 \
\text { Fixed selling and administrative costs } & 85,000 \
\text { Fixed manufacturing costs } & 72,000 \
\text { Fixed selling and administrative costs } & 80,000 \
\text { Variable manufacturing costs } & 1,030,000 \
\text { Variable selling and administrative costs } & 120,000 \
\text { Selling unit price } & 125 \
& \
\text { Units produced and sold } & 23,000
\end{array}$ Assuming there is excess capacity, the effect of accepting a special order for 1,000 units at a price of $80.00 per scissors will be _____.
A)net income would increase by $1,000
B)net income would increase by $22,500
C)net income would decrease by $80,000
D)net income would decrease by $200,000

Question

Quizplus · Accepted Answer

The effect of accepting a special order at a lower price primarily involves variable costs and the special order price. Fixed costs are not affected by the special order since they remain constant regardless of production volume, assuming there is excess capacity. The calculation for the net income increase due to the special order is as follows: Special order revenue (1,000 units * $80/unit) = $80,000. Variable costs for the special order (Variable manufacturing costs + Variable selling and administrative costs per unit * 1,000 units). Given total variable costs are $1,150,000 ($1,030,000 manufacturing + $120,000 selling and administrative) for 23,000 units, the per unit variable cost is $50 ($1,150,000 / 23,000 units). Thus, total variable costs for the special order = $50/unit * 1,000 units = $50,000. Net income increase = Special order revenue - Variable costs for the order = $80,000 - $50,000 = $30,000. However, the correct calculation for the net income increase should consider the correct approach and data provided, leading to the conclusion that the net income would increase, but the specific amount needs to be accurately recalculated based on the correct interpretation of the provided data and the question's requirements.

Minnesota Inc Assuming There Is Excess Capacity, the Effect of Accepting a