Kansas Company uses activity-based costing.The company produces and sells 20,000 units at $22 per unit.Kansas Company's product cost is calculated as follows:
$$\begin{array} { l l }
\text { Variable costs } & \$ 10 \text { per unit } \
\text { Fixed costs } & \$ 2 \text { per unit } \
\text { Setup costs } & \$ 3 \text { per unit } \
\text { Total costs } & \$ 15 \text { per unit }
\end{array}$$
A total of 500 setups at a cost of $120 per setup are required to produce the 20,000 units.Kansas Company has received a special order to sell 5,000 units at $12 per unit.Kansas Company has excess capacity available,but these 5,000 units would require 60 setups.If Kansas Company accepts the special order,what is the increase or decrease in net income?
A) $0
B) decrease $5,000
C) decrease $15,000
D) increase $2,800

Question

Kansas Company uses activity-based costing.The company produces and sells 20,000 units at $22 per unit.Kansas Company's product cost is calculated as follows:
$$\begin{array} { l l } 
\text { Variable costs } & \$ 10 \text { per unit } \
\text { Fixed costs } & \$ 2 \text { per unit } \
\text { Setup costs } & \$ 3 \text { per unit } \
\text { Total costs } & \$ 15 \text { per unit }
\end{array}$$
A total of 500 setups at a cost of $120 per setup are required to produce the 20,000 units.Kansas Company has received a special order to sell 5,000 units at $12 per unit.Kansas Company has excess capacity available,but these 5,000 units would require 60 setups.If Kansas Company accepts the special order,what is the increase or decrease in net income?
A) $0
B) decrease $5,000
C) decrease $15,000
D) increase $2,800

Quizplus · Accepted Answer

The special order's variable cost per unit is $10, and the setup cost per order is $120 * 60 setups = $7,200. The total variable cost for 5,000 units is $10 * 5,000 = $50,000. The total cost for the special order is $50,000 + $7,200 = $57,200. The revenue from the special order is $12 * 5,000 = $60,000. The increase in net income is $60,000 - $57,200 = $2,800. Fixed costs per unit are irrelevant for the special order decision since they are incurred regardless of the decision.

Kansas Company Uses Activity-Based Costing A Total of 500 Setups at a Cost of $120