Arkansas Corporation provided the following information regarding its only product--tables: $$\begin{array} { l r }
\text { Selling price per unit } & \$ 65 \
\text { Direct materials used } & 150,000 \
\text { Direct labor } & 225,000 \
\text { Variable factory overhead } & 140,000 \
\text { Variable selling and administrative expenses } & 60,000 \
\text { Fixed factory overhead } & 370,000 \
\text { Fixed selling and administrative expenses } & 30,000 \
& \
\text { Units produced and sold } & 20,000
\end{array}$$ Assuming there is excess capacity, the effect of accepting a special order for 1,000 units at a price of $40.00 per table is that net income would _____.
A)increase by $40,000
B)increase by $11,250
C)decrease by $28,750
D)decrease by $10,000

Question

Arkansas Corporation provided the following information regarding its only product--tables: $$\begin{array} { l r } 
\text { Selling price per unit } & \$ 65 \
\text { Direct materials used } & 150,000 \
\text { Direct labor } & 225,000 \
\text { Variable factory overhead } & 140,000 \
\text { Variable selling and administrative expenses } & 60,000 \
\text { Fixed factory overhead } & 370,000 \
\text { Fixed selling and administrative expenses } & 30,000 \
& \
\text { Units produced and sold } & 20,000
\end{array}$$ Assuming there is excess capacity, the effect of accepting a special order for 1,000 units at a price of $40.00 per table is that net income would _____.
A)increase by $40,000
B)increase by $11,250
C)decrease by $28,750
D)decrease by $10,000

Quizplus · Accepted Answer

To calculate the effect of accepting the special order on net income, we need to consider the incremental revenue and incremental costs. The incremental revenue from the special order is 1,000 units * $40/unit = $40,000. The incremental costs include direct materials, direct labor, and variable factory overhead and selling expenses. Fixed costs are not affected by the special order due to excess capacity.Incremental costs calculation:- Direct materials per unit = $150,000 / 20,000 units = $7.5- Direct labor per unit = $225,000 / 20,000 units = $11.25- Variable factory overhead per unit = $140,000 / 20,000 units = $7- Variable selling and administrative expenses per unit = $60,000 / 20,000 units = $3Total variable cost per unit = $7.5 + $11.25 + $7 + $3 = $28.75Total incremental cost for 1,000 units = 1,000 units * $28.75/unit = $28,750Incremental profit = Incremental revenue - Incremental costs = $40,000 - $28,750 = $11,250Therefore, accepting the special order would increase net income by $11,250.

Arkansas Corporation Provided the Following Information Regarding Its Only Product--Tables