Wade Company is operating at 75% of its manufacturing capacity of 140,000 product units per year. A customer has offered to buy an additional 20,000 units at $32 each and sell them outside the country so as not to compete with Wade. The following data are available: In producing 20,000 additional units, fixed overhead costs would remain at their current level but incremental variable overhead costs of $6 per unit would be incurred. What is the effect on income if Wade accepts this order?
A) Income will decrease by $4 per unit.
B) Income will increase by $4 per unit.
C) Income will increase by $5 per unit.
D) Income will decrease by $5 per unit.
E) Income will increase by $11 per unit.

Question

Wade Company is operating at 75% of its manufacturing capacity of 140,000 product units per year. A customer has offered to buy an additional 20,000 units at $32 each and sell them outside the country so as not to compete with Wade. The following data are available:  In producing 20,000 additional units, fixed overhead costs would remain at their current level but incremental variable overhead costs of $6 per unit would be incurred. What is the effect on income if Wade accepts this order?
A) Income will decrease by $4 per unit. 
B) Income will increase by $4 per unit. 
C) Income will increase by $5 per unit. 
D) Income will decrease by $5 per unit. 
E) Income will increase by $11 per unit.

Quizplus · Accepted Answer

Capacity: 140,000 units − 0.75(140,000) units = 35,000 unit capacity remaining
Relevant costs: $12 + $9 + $6 = $27 per unit
Effect on income: $32 − $27 = $5 increase per unit

Wade Company Is Operating at 75% of Its Manufacturing Capacity