Eakins Corporation has just developed a new product.At an expected sales level of 60, 000 units per year, the company anticipates that the following costs will be incurred: Eakins Corporation uses the absorption costing approach to cost-plus pricing as described in the text. Assume that after introducing the new product, the company finds that it has excess capacity.A foreign dealer has offered to purchase 2, 000 units at a special price of $36 per unit.This sale would not disturb regular business.If the special price is accepted on the 2, 000 units, the company's overall net income for the year should:
A)decrease by $24, 000
B)increase by $20, 000
C)increase by $8, 000
D)increase by $32, 000

Question

Eakins Corporation has just developed a new product.At an expected sales level of 60, 000 units per year, the company anticipates that the following costs will be incurred:  Eakins Corporation uses the absorption costing approach to cost-plus pricing as described in the text. Assume that after introducing the new product, the company finds that it has excess capacity.A foreign dealer has offered to purchase 2, 000 units at a special price of $36 per unit.This sale would not disturb regular business.If the special price is accepted on the 2, 000 units, the company's overall net income for the year should:
A)decrease by $24, 000 
B)increase by $20, 000 
C)increase by $8, 000 
D)increase by $32, 000

Quizplus · Accepted Answer

To determine the impact on net income, we need to calculate the incremental cost and revenue for the special order.

Incremental revenue: 2,000 units x $36 per unit = $72,000

Incremental cost: 
Direct materials: 2,000 units x $12 per unit = $24,000 
Direct labor: 2,000 units x $8 per unit = $16,000 
Variable overhead: 2,000 units x $4 per unit = $8,000

Total incremental cost: $48,000

Therefore, the incremental profit from the special order is $24,000 ($72,000 - $48,000), which will increase overall net income for the year.

Eakins Corporation Has Just Developed a New Product