Nebraska Company uses activity-based costing.The company produces and sells 20,000 units at $20 per unit.Nebraska Company's product cost is calculated as follows:
$$\begin{array} { l l }
\text { Variable costs } & \$ 8 \text { per unit } \
\text { Fixed costs } & \$ 2 \text { per unit } \
\text { Setup costs } & \$ 3 \text { per unit } \
\text { Total costs } & \$ 13 \text { per unit }
\end{array}$$
A total of 500 setups at a cost of $120 per setup are required to produce the 20,000 units.Nebraska Company has received a special order to sell 5,000 units at $11 per unit.Nebraska Company has excess capacity available,but these 5,000 units would require 60 setups.If Nebraska Company accepts the special order,what is Nebraska's increase in net income?
A) increase $5,000
B) increase $7,800
C) decrease $2,800
D) decrease $5,000

Question

Nebraska Company uses activity-based costing.The company produces and sells 20,000 units at $20 per unit.Nebraska Company's product cost is calculated as follows:
$$\begin{array} { l l } 
\text { Variable costs } & \$ 8 \text { per unit } \
\text { Fixed costs } & \$ 2 \text { per unit } \
\text { Setup costs } & \$ 3 \text { per unit } \
\text { Total costs } & \$ 13 \text { per unit }
\end{array}$$
A total of 500 setups at a cost of $120 per setup are required to produce the 20,000 units.Nebraska Company has received a special order to sell 5,000 units at $11 per unit.Nebraska Company has excess capacity available,but these 5,000 units would require 60 setups.If Nebraska Company accepts the special order,what is Nebraska's increase in net income?
A) increase $5,000
B) increase $7,800
C) decrease $2,800
D) decrease $5,000

Quizplus · Accepted Answer

The special order's variable costs are $8 per unit, and the setup costs are $120 per setup for 60 setups, totaling $7,200. The total cost for the special order is $8 * 5,000 + $7,200 = $47,200. The revenue from the special order is $11 * 5,000 = $55,000. The increase in net income is $55,000 - $47,200 = $7,800. Fixed costs per unit are not relevant for the special order decision since they are incurred regardless of the order.

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