Seville Company manufactures a product with a unit variable cost of $42 and a unit sales price of $75.Fixed manufacturing costs were $80,000 when 10,000 units were produced and sold, equating to $8 per unit.The company has a one-time opportunity to sell an additional 1,500 units at $55 each in an international market which would not affect its present sales.The company has sufficient capacity to produce the additional units.How much is the relevant income effect of accepting the special order?
A)$63,000
B)$7,500
C)$50,000
D)$19,500

Question

Quizplus · Accepted Answer

The relevant income effect of accepting the special order can be calculated as follows:

Incremental revenue = (1,500 units x $55/unit) = $82,500
Incremental variable cost = (1,500 units x $42/unit) = $63,000
Incremental fixed cost = $0 (since the company has sufficient capacity to produce the additional units)

Therefore, the incremental profit from accepting the special order is:

Incremental profit = Incremental revenue - Incremental variable cost = $82,500 - $63,000 = $19,500

Thus, the relevant income effect of accepting the special order is $19,500.

Seville Company Manufactures a Product with a Unit Variable Cost