Question

Markson Company had the following results of operations for the past year:

Sales (8,000 units at $20.20)				$	161,600
Variable manufacturing costs	$	86,800
Fixed manufacturing costs		15,200
Variable selling and administrative expenses		12,800
Fixed selling and administrative expenses		20,200			(135,000	)
Operating income				$	26,600

A foreign company whose sales will not affect Markson's market offers to buy 2,000 units at $14.30 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $1,620 for the purchase of special tools. Markson’s annual productive capacity is 12,000 units. If Markson accepts this additional business, its profits will:

Multiple Choice

Decrease by $5,150.

Increase by $2,080.

Decrease by $1,620.

Decrease by $5,320.

Increase by $3,700.

#16

Answer 1

• The answer can be found out by doing the Cost Benefit Analysis:

Benefit:
Special Order Sale [2000 x $ 14.30]	$                28,600
Costs:
Variable manufacturing [2000 x 86800/8000]	$                21,700
Variable selling & admin [2000 x 12800/8000]	$                   3,200
Increase in Fixed Overhead	$                   1,620
Total Cost	$                26,520
Net Benefits	$                   2,080

• Hence, Correct Answer = Option #2: Profits will Increase by $ 2,080