Aerotoy Company makes toy airplanes.One plane is an excellent replica of a 737; it sells for $5.Vacation Airlines wants to purchase 12,000 planes at $1.75 each to give to children flying unaccompanied.Costs per plane are as follows: No variable marketing costs would be incurred.The company is operating significantly below the maximum productive capacity.No fixed costs are avoidable.However,Vacation Airlines wants its own logo and colors on the planes.The cost of the decals is $0.01 per plane and a special machine costing $1,500 would be required to affix the decals.After the order is complete,the machine would be scrapped.Should the special order be accepted?
A)Yes,income will increase by $300
B)No,income will decrease by $180
C)No,income will decrease by $1,500
D)Yes,income will increase by $180
E)It doesn't matter; there will be no change in income

Question

Aerotoy Company makes toy airplanes.One plane is an excellent replica of a 737; it sells for $5.Vacation Airlines wants to purchase 12,000 planes at $1.75 each to give to children flying unaccompanied.Costs per plane are as follows:  No variable marketing costs would be incurred.The company is operating significantly below the maximum productive capacity.No fixed costs are avoidable.However,Vacation Airlines wants its own logo and colors on the planes.The cost of the decals is $0.01 per plane and a special machine costing $1,500 would be required to affix the decals.After the order is complete,the machine would be scrapped.Should the special order be accepted?
A)Yes,income will increase by $300 
B)No,income will decrease by $180 
C)No,income will decrease by $1,500 
D)Yes,income will increase by $180 
E)It doesn't matter; there will be no change in income

Quizplus · Accepted Answer

The first step is to calculate the total cost of producing the 12,000 planes with the customized logo and colors.

Variable Cost per plane = $1.75 
Cost of Decals per plane = $0.01 
Total Variable Cost per plane = $1.75 + $0.01 = $1.76

Total Variable Cost for 12,000 planes = $1.76 x 12,000 = $21,120

In addition to the variable costs, there is the cost of the special machine which is a one-time fixed cost. This cost is not avoidable in any case so we can ignore it for the decision making.

Total Revenue 
= Selling price per plane x Number of planes 
= $5 x 12,000 
= $60,000

Total Cost 
= Total Variable Cost + Total Fixed Cost 
= $21,120 + $0 
= $21,120

Total Profit 
= Total Revenue - Total Cost 
= $60,000 - $21,120 
= $38,880

Therefore, the special order should be accepted because it would increase the income by $38,880.

However, it's important to note that the answer would have been different if the fixed cost of the special machine was avoidable or if the company was operating at full capacity.

Aerotoy Company Makes Toy Airplanes