Reggie Corporation manufactures a single product with the following unit costs for 1,000 units: Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each. Currently, the models are sold to dealers for $7,800. Reggie Corporation's capacity is sufficient to produce the extra 100 units. No additional selling expenses would be incurred on the special order.
How much will income change if the special order is accepted?
A) increase by $398,400
B) decrease by $180,000
C) increase by $111,600
D) no change

Question

Reggie Corporation manufactures a single product with the following unit costs for 1,000 units:  Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each. Currently, the models are sold to dealers for $7,800. Reggie Corporation's capacity is sufficient to produce the extra 100 units. No additional selling expenses would be incurred on the special order.
How much will income change if the special order is accepted?
A) increase by $398,400 
B) decrease by $180,000 
C) increase by $111,600 
D) no change

Quizplus · Accepted Answer

To determine the change in income, we need to calculate the contribution margin of the special order.

Contribution margin per unit = selling price per unit - unit variable cost = $5,100 - $4,300 = $800

Contribution margin for 100 units = $800 × 100 = $80,000

Since there are no additional selling expenses, the entire contribution margin will increase the income.

Therefore, the income will increase by $80,000 if the special order is accepted.

New income = Old income + Contribution margin from the special order 
New income = ($7,800 × 1,000) + $80,000 = $7,880,000

Increase in income = $7,880,000 - $7,768,400 = $111,600

Hence, the best choice is C.

Reggie Corporation Manufactures a Single Product with the Following Unit