Bramble Manufacturing has an annual capacity of 80,700 units per year. Currently

Question

Bramble Manufacturing has an annual capacity of 80,700 units per year. Currently, the company is making and selling 78,500 units a year. The normal sales price is $104 per unit, variable costs are $70 per unit, and total fixed expenses are $2,000,000. An out-of-state distributor has offered to buy 5,700 units at $80 per unit. Bramble's cost structure should not change as a result of this special order.

By how much will Bramble's income change if the company accepts this order?

if it accepts the special order.

  increase  decrease

if it accepts the special order.

Explanation / Answer

Current contribution margin per unit Sales price per unit = $104 Variable cost per unit = $70 Contribution margin per unit = $34 Contribution margin per unit of Special order Sales price per unit = $80 Variable cost per unit = $70 Contribution margin per unit = $10 Annual capacity = 80700 units Current production and sales units = 78500 units excess capacity available = 80700-78500 = 2200 units Units to be taken from from current production and sales to satisfy the special order = 5700-2200 = 3500 units Increase of contribution margin due to special order = 5700*$10 = $57000 Loss of contribution margin due to special order = 3500*$34 = $119000 Decrease of net income due to special order = $119000-$57000 = $62000

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