Hubba Company has a current production capacity level of 200,000 units per month

Question

Hubba Company has a current production capacity level of 200,000 units per month. At this level of production, variable costs ar $.90 per unit and fixed costs ar .50 per unit. Current monthly sales are 164,500. Bubba Company has contacted Hubba Company about purchasing 20,000 units at $2.00 each. Current sales would not be affected by the special order and no additional fixed costs would be incurred on the special order. If Hubba Company decides to accept the special order, Hubba Company's costs will increase by:

A) $20,000
B) $24,000
C) $18,000
D) $40,000

Explanation / Answer

Only costs related to the special order are the 0.9/unit variable cost. So increased cost = no of units in special order * 0.9 = 20,000*0.9 = 18,000

So the answer is choice C - $18,000

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