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There are a number of individual decisions covered in this week’s material. One is incremental analysis. The problem below is an example of this. The only things that are different in the various scenarios are sales dollars and variable costs. Since fixed costs are fixed, they have no impact on the decision. So, as long as the additional units can be sold at a price higher than the variable cost, the order will increase net income.
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Your company produces 10,000 units which is 80% of capacity and its normal |
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selling price is $25/unit. |
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The following cost data are provided at 10,000 units: |
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Variable cost per unit |
$16 |
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Fixed cost per unit |
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a) Should you accept a special order from a foreign company for an additional |
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2,000 units at a special price of $22/unit? |
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b) Should you accept the order at $19/unit? |
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c) Should you accept the order at $15/unit? |
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Without |
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Special |
With Special |
Order |
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$22 |
$19 |
$15 |
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Sales |
250,000 |
294,000 |
288,000 |
280,000 |
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Variable Cost |
(160,000) |
(192,000) |
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Fixed Cost |
(40,000) |
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Net Income |
50,000 |
62,000 |
56,000 |
48,000 |
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Change in Revenue |
44,000 |
38,000 |
30,000 |
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Change in Expense |
32,000 |
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Change in Net Income |
12,000 |
6,000 |
(2,000) |
