Arkansas Company has no beginning and ending inventories,and has obtained the following data for its only product:
$\begin{array}{ll}
\text { Selling price per unit } & \$ 65 \
\text { Direct materials used } & \$ 150,000 \
\text { Direct labor } & \$ 225,000 \
\text { Variable factory overhead } & \$ 140,000 \
\text { Variable selling and administrative expenses } & \$ 60,000 \
\text { Fixed factory overhead } & \$ 370,000 \
\text { Fixed selling and administrative expenses } & \$ 30,000
\end{array}$
$\begin{array} { l }
\text {Units produced and sold }&20,000 \
\end{array}$

Assume there is excess capacity.There is a special order outstanding for 1,000 units at $40.00 per unit.If Arkansas Company accepts the special order,net income would ________.
A) increase by $40,000
B) increase by $11,250
C) decrease by $28,750
D) decrease by $10,000

Question

Arkansas Company has no beginning and ending inventories,and has obtained the following data for its only product:
$\begin{array}{ll}
\text { Selling price per unit } & \$ 65 \
\text { Direct materials used } & \$ 150,000 \
\text { Direct labor } & \$ 225,000 \
\text { Variable factory overhead } & \$ 140,000 \
\text { Variable selling and administrative expenses } & \$ 60,000 \
\text { Fixed factory overhead } & \$ 370,000 \
\text { Fixed selling and administrative expenses } & \$ 30,000
\end{array}$
$\begin{array} { l  }
 \text {Units produced and sold }&20,000 \
\end{array}$

Assume there is excess capacity.There is a special order outstanding for 1,000 units at $40.00 per unit.If Arkansas Company accepts the special order,net income would ________.
A) increase by $40,000
B) increase by $11,250
C) decrease by $28,750
D) decrease by $10,000

Quizplus · Accepted Answer

To determine the effect on net income, calculate the incremental revenue and incremental costs. Incremental revenue from the special order is $1,000 \times \$40 = \$40,000$. Incremental costs include variable costs: direct materials, direct labor, variable factory overhead, and variable selling and administrative expenses. Fixed costs are not affected by the special order due to excess capacity. Calculate variable costs per unit: $\frac{\$150,000 + \$225,000 + \$140,000 + \$60,000}{20,000} = \$28.75$ per unit. Incremental costs for the special order are $1,000 \times \$28.75 = \$28,750$. The increase in net income is the incremental revenue minus incremental costs: \$40,000 - \$28,750 = \$11,250.

Arkansas Company Has No Beginning and Ending Inventories,and Has Obtained