Sports Specialty Inc. produces a bicycle that it normally sells wholesale for $2
ID: 2416231 • Letter: S
Question
Sports Specialty Inc. produces a bicycle that it normally sells wholesale for $250 per bike. The variable costs of production are $160 and the fixed cost for this product line is $154,000 per month. The company has been selling this product at a rate of 2,000 units per month. The company has received an order for 1,000 bikes at a price of $182 per bike. The order is to ship to a market where the company has no business, so it is believed it will not adversely affect existing business. The company has the capacity to produce the special order. How much will operating profit increase if Sports Specialty accepts this order?
increase of $26,000
increase of $48,000
decrease of $55,000
increase of $22,000
increase of $26,000
increase of $48,000
decrease of $55,000
increase of $22,000
Explanation / Answer
If Sports Speciality accepts the order, it will increase the operating profit by $22000
Statement of profit of Sports Specialty Inc.
#Fixed cost of $154000 is not considered as it is unavoidable cost. It will continue to occur with the same amount irrespective of the decision to accept or reject the order.
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