Cornish Company had the following results of operations for the past year Sales

Question

Cornish Company had the following results of operations for the past year Sales (20,000 units at $22) Direct materials and direct labor $440,000 $200,000 Overhead (40% variable) 100,000 Selling and administrative expenses (all fixed) 92,000 (392,000) Operating income $48,000 A foreign company (whose sales will not affect Cornish's market) offers to buy 3,000 units at $1700 per unit. In addition to variable manufacturing costs, selling these units would incréase fixed overhead by $500 and selling and administrative costs by $1,000 If Cornish accepts the offer, its profits will: O Increase by $15,000 O increase by $13,500. O Increase by $4,500 O Decrease by $4,500 O Decrease by $300.

Explanation / Answer

Direct material and labor cost per unit = 200,000/20,000 = 10 $ per unit

Variable overhead per unit = .40*100,000/20,000 = 2 $ per unit

Total variable cost = 12$ per unit

Selling price for 3000 units= 17$ per unit

Profit = Sales*(Selling price-variable cost) – increase in fixed cost

= 3000*(17-12) – 500 -1000

= 13500 $ increase in profits

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