Talk Made EZ Company makes special equipment used in cell phones. Each unit sell
ID: 2456612 • Letter: T
Question
Talk Made EZ Company makes special equipment used in cell phones. Each unit sells for $400. Talk Made EZ uses just-in-time inventory procedures; it produces and sells 12,500 units per year. It has provided the following income statement data:
Traditional Costing
Contribution Margin
Revenue
$5,000,000
Revenue
$5,000,000
Cost of goods sold
3,000,000
Variable Expenses
Gross profit
2,000,000
Manufacturing
1,000,000
Selling & admin expenses
650,000
Selling & admin
400,000
Contribution Margin
3,600,000
Fixed Expenses
Manufacturing
2,000,000
Selling & admin
250,000
Operating income
$1,350,000
Operating income
$1,350,000
A foreign company has offered to buy 100 units for a reduced price of $250 per unit. The marketing manager says the sale will not negatively impact the company's regular sales. The sales manager says that this sale will not require any incremental selling & administrative costs, as it is a one-time deal. The production manager reports that there is plenty of excess capacity to accommodate the deal without requiring any additional fixed costs. If Talk Made EZ accepts the deal, how will this impact operating income?
A) up $17,000
B) down $8,000
C) up $25,000
D) down $800
Traditional Costing
Contribution Margin
Revenue
$5,000,000
Revenue
$5,000,000
Cost of goods sold
3,000,000
Variable Expenses
Gross profit
2,000,000
Manufacturing
1,000,000
Selling & admin expenses
650,000
Selling & admin
400,000
Contribution Margin
3,600,000
Fixed Expenses
Manufacturing
2,000,000
Selling & admin
250,000
Operating income
$1,350,000
Operating income
$1,350,000
Explanation / Answer
Answer A. up $17000 Statement Showing Incremental Profit /(Loss) Particulars Amount Increased Sales - 100 units @ $250 per Unit 25000 Less: Variable Exp. Manufacturing Exp. - 8,000 (1,000,000 / 12500 X 100 Units) Incremental Profit 17,000
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