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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.

Your company produces 10,000 units which is 80% of capacity and its normal

selling price is $25/unit.

 

 

 

 

The following cost data are provided at 10,000 units:

 

 

 

Variable cost per unit

$16

 

 

 

Fixed cost per unit

4

 

 

 

 

 

 

 

 

a) Should you accept a special order from a foreign company for an additional

     2,000 units at a special price of $22/unit?

 

 

 

 

 

 

 

 

 

b) Should you accept the order at $19/unit?

 

 

 

 

 

 

 

 

 

c) Should you accept the order at $15/unit?

 

 

 

 

 

 

 

 

 

 

Without

 

 

 

 

 

Special

With Special Order

 

 

Order

$22

$19

$15

 

Sales

            250,000

     294,000

     288,000

    280,000

 

Variable Cost

         (160,000)

  (192,000)

  (192,000)

  (192,000)

 

Fixed Cost

            (40,000)

     (40,000)

     (40,000)

    (40,000)

 

Net Income

              50,000

       62,000

       56,000

       48,000

 

 

 

 

 

 

 

Change in Revenue

 

       44,000

       38,000

       30,000

 

Change in Expense

 

       32,000

       32,000

       32,000

 

Change in Net Income

 

       12,000

         6,000

       (2,000)

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