Preston Company manufactures a product with a unit variable cost of $140 and a unit sales price of $264. Fixed manufacturing costs were $720000 when 10000 units were produced and sold. The company has a one-time opportunity to sell an additional 3000 units at $210 each in a foreign market which would not affect its present sales. If the company has sufficient capacity to produce the additional units acceptance of the special order would affect net income as follows:
A) Income would decrease by $162000.
B) Income would increase by $156000.
C) Income would increase by $6000.
D) Income would increase by $210000.

Question

Quizplus · Accepted Answer

First, let's calculate the contribution margin per unit of the original product:

Contribution margin per unit = Sales price per unit - Unit variable cost
Contribution margin per unit = $264 - $140
Contribution margin per unit = $124

Now, let's calculate the break-even point for the original product:

Break-even point (in units) = Fixed costs / Contribution margin per unit
Break-even point (in units) = $720,000 / $124
Break-even point (in units) = 5806.45

Since the company already sold 10,000 units, it has exceeded its break-even point, and any additional unit sold will generate profit.

Let's calculate the contribution margin per unit for the special order:

Contribution margin per unit = Sales price per unit - Unit variable cost
Contribution margin per unit = $210 - $140
Contribution margin per unit = $70

The company will earn a contribution margin of $70 per unit on the special order.

The total contribution margin for the additional 3000 units sold will be:

Total contribution margin = Contribution margin per unit x Number of units
Total contribution margin = $70 x 3000
Total contribution margin = $210,000

Since the special order will not incur any additional fixed costs, the entire contribution margin will increase the net income. Therefore, the acceptance of the special order will increase the company's net income by $210,000.

Therefore, the answer is D) Income would increase by $210,000.

Preston Company Manufactures a Product with a Unit Variable Cost