Question

Ayayai Manufacturing has an annual capacity of 80,900 units per year. Currently, the company is making and selling 78,300 units a year. The normal sales price is $100 per unit, variable costs are $65 per unit, and total fixed expenses are $2,000,000. An out-of-state distributor has offered to buy 6,000 units at $70 per unit. Ayayai's cost structure should not change as a result of this special order. By how much will Ayayai's income change if the company accepts this order?

will her income increase or decrease? by how much?

Answer 1

Answer:

• The annual capacity is 80,900 units. If order is accepted of 6,000 units the company will be able to sell only 74,900 units (insteadof78, 300).

• Comparative Net Income calculation

	Normal Sale	Offer Sale
Units	78,300	74,900+6,000=80,900
Sales Revenue	$7,830,000 78,300*$100	$7,910,000 (74,900*$100+6,000*$70)
(-)Variable cost@65 per unit	$5,089,500	$5,258,500
Contribution margin	$2,740,500	$2,651,500
(-)Fixed expenses	$2,000,000	$2,000,000
New Net Income	$740,500	$651,500

Analysis

Net Income without offer	$         740,500
Net Income if offer is accepted	$         651,500
Decrease in Net Income	$            89,000

Net Income will DECREASE by $ 89,000 if it accepts the order.