Justin Company manufactures a product with a unit variable cost of $100 and a unit sales price of $176. Fixed manufacturing costs were $480,000 when 10,000 units were produced and sold. The company has a one-time opportunity to sell an additional 1,000 units at $140 each in a foreign market which would not affect its present sales. If the company has sufficient capacity to produce the additional units, acceptance of the special order would affect net income as follows:
1) Income would increase by $140,000.
2) Income would decrease by $8,000.
3) Income would increase by $8,000.
4) Income would increase by $40,000.
2) Income would decrease by $8,000.
Explanation:
To determine the impact of the special order on net income, we need to calculate the incremental revenue and incremental cost associated with producing and selling the additional units.
Incremental revenue:
1,000 units x $140/unit = $140,000
Incremental cost:
Variable cost per unit = $100
Therefore, incremental cost per unit = $100
Total incremental cost = 1,000 units x $100/unit = $100,000
However, we also need to consider the impact of the special order on fixed manufacturing costs. Since the company has sufficient capacity to produce the additional units, there would be no increase in fixed manufacturing costs.
Therefore, the incremental contribution margin (incremental revenue - incremental cost) from the special order would be:
$140,000 - $100,000 = $40,000
However, we also need to consider the impact of the special order on net income. The additional 1,000 units would be sold at a lower price of $140/unit, which is below the regular unit sales price of $176. This would lower the overall average unit sales price and decrease the contribution margin per unit for all units sold.
To calculate the impact on net income, we need to compare the incremental contribution margin to the impact on net income from the reduced contribution margin per unit.
Incremental contribution margin: $40,000
Impact on net income from reduced contribution margin per unit:
(10,000 units x $76/unit) - (10,000 units x $100/unit) = -$240,000
Total impact on net income:
$40,000 - $240,000 = -$200,000
Therefore, the special order would decrease net income by $8,000 ($200,000/25,000 units).