Your Company has just obtained a request for a special order of 6,000 units to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 units per month with total fixed production costs of $144,000. At present, the company is selling 80,000 units per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one unit is: Variable production cost ... $4.60 Fixed production cost ...... 1.80 Variable selling expense ... 1.00 If the special order is accepted, Your Company will not have any selling expense; however, it will have shipping costs of $0.30 per unit. What is the increase in net operating income if Your Company accepts this special order? a. $12,600. b. $14,400. c. $3,600. d. $1,800.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Your Company has just obtained a request for a special order of 6,000 units to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 units per month with total fixed production costs of $144,000. At present, the company is selling 80,000 units per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one unit is:
Variable production cost ... $4.60
Fixed production cost ...... 1.80
Variable selling expense ... 1.00
If the special order is accepted, Your Company will not have any selling expense; however, it will have shipping costs of $0.30 per unit. What is the increase in net operating income if Your Company accepts this special order?
a. $12,600.
b. $14,400.
c. $3,600.
d. $1,800.
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