The following information relates to a product produced by Creamer Company: Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold.Although production capacity is 600,000 units per year, the company expects to produce only 400,000 units next year.The product normally sells for $120 each.A customer has offered to buy 60,000 units for $90 each.
If the firm produces the special order, the effect on income would be a
A) $360,000 increase.
B) $360,000 decrease.
C) $540,000 increase.
D) $540,000 decrease.

Question

The following information relates to a product produced by Creamer Company:  Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold.Although production capacity is 600,000 units per year, the company expects to produce only 400,000 units next year.The product normally sells for $120 each.A customer has offered to buy 60,000 units for $90 each.
If the firm produces the special order, the effect on income would be a
A) $360,000 increase. 
B) $360,000 decrease. 
C) $540,000 increase. 
D) $540,000 decrease.

Quizplus · Accepted Answer

If the firm produces the special order, the additional revenue would be: 
60,000 units x $90 = $5,400,000

The total variable cost of producing 60,000 units would be:
60,000 units x $60 (cost per unit) = $3,600,000

The total fixed selling costs are unaffected by the decision to accept or reject the order.
Therefore, the incremental profit would be:
$5,400,000 - $3,600,000 - $500,000 = $1,300,000

Hence, the effect on income would be an increase of $1,300,000, which is choice C.

The Following Information Relates to a Product Produced by Creamer