Thompson Company had the following results of operations for the past year: A fo

Question

Thompson Company had the following results of operations for the past year: A foreign company (whose sales will not affect Thompson's market) offers to buy 4,000 units at $7.50 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300. If Thompson accepts the offer, its profits will: A. Increase by $30,000 B. Increase by $6,000 C. Decrease by $6,000 D. Increase by $5,200 E. Increase by $4,300 6. 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.

Explanation / Answer

5. The correct answer is E. Increase by $ 4,300

Variable cost per unit = (Direct materials and direct labor + Variable overhead) / Number of units sold = $ (96,000 + 3,200 ) / 16,000 = $ 6.2

Profit / ( loss) from special order = Contribution margin from special order - Additional fixed costs = 4,000 x $ ( 7.50 - 6.20) - $ ( 600+300) = $ 4,300

6. C. Income will increase by $ 5 per unit

Contribution per unit of the special order = Selling price - Variable cost = $ 32 - $ ( 12 + 9 + 6 ) = $ 5

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