Wade Company is operating at 75% of its manufacturing capacity of 70,000 product units per year. A customer has offered to buy an additional 10,500 units at $22 each and sell them outside the country so as not to compete with Wade. The following data are available:
| Costs at 75% capacity: | Per unit |
Total |
| Direct materials | $8.80 | $462,000 |
| Direct labor | 6.60 | 346,500 |
| Overhead (fixed and variable) | 11.00 | 577,500 |
| Totals | $26.40 | $1,386,000 |
|
In producing 10,500 additional units, fixed overhead costs would
remain at their current level but incremental variable overhead
costs of $4.4 per unit would be incurred. What is the effect on
income if Wade accepts this order? |
| Income will increase by $4.40 per unit. | |
| Income will decrease by $4.40 per unit. | |
| Income will increase by $2.20 per unit. | |
| Income will increase by $6.60 per unit. | |
| Income will decrease by $19.80 per unit. |
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CommentTherefore producing of 10,500 units would effect the net income with an increase by 2.20 per unit. The fixed costs are ignored because of the reason that they are constant in either of decisions.
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For new order, Var cost pu = DM + DL + VC pu = 8.8+6.60+4.4 = 19.8 pu
So Addl cont pu = $22-$27 = $22
So Ans is C. Income will increase by $2.2 per unit.
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