Reggie Corporation manufactures a single product with the following unit costs for 1,000 units: Recently,a company approached Reggie Corporation about buying 100 units for $5,100 each.Currently,the models are sold to dealers for $7,800.Reggie Corporation's capacity is sufficient to produce the extra 100 units.No additional selling expenses would be incurred on the special order.
How much will income change if the special order is accepted?
A)increase by $398,400
B)decrease by $180,000
C)increase by $111,600
D)no change

Question

Reggie Corporation manufactures a single product with the following unit costs for 1,000 units:  Recently,a company approached Reggie Corporation about buying 100 units for $5,100 each.Currently,the models are sold to dealers for $7,800.Reggie Corporation's capacity is sufficient to produce the extra 100 units.No additional selling expenses would be incurred on the special order.
How much will income change if the special order is accepted?
A)increase by $398,400 
B)decrease by $180,000 
C)increase by $111,600 
D)no change

Quizplus · Accepted Answer

To calculate the income change, we need to compare the income earned from the special order with the income earned from the regular sales.

Income from the special order:
100 units x $5,100 per unit = $510,000

Income from regular sales:
1,000 units x $7,800 per unit = $7,800,000

Total income = $8,310,000

Total cost of producing 1,100 units:
1,000 units x $11 per unit = $11,000
100 units x $7 per unit (variable cost only) = $700

Total cost = $11,700

Therefore, income = Total income - Total cost
Income = $8,310,000 - $11,700 = $8,298,300

If we had only sold the regular amount of 1,000 units, the income would have been:
1,000 units x $7,800 per unit = $7,800,000

Therefore, the income change would be:
$8,298,300 - $7,800,000 = $498,300 increase

However, the question is asking for the income change if the special order is accepted, meaning we add the income earned from the special order to the regular income.

$498,300 + $510,000 = $1,008,300

Therefore, the income change if the special order is accepted is an increase of $1,008,300 - $7,800,000 = $208,300.

Option A is incorrect because it overstates the income change by adding the regular income twice. 
Option B is incorrect because there is actually an increase in income, not a decrease. 
Option D is incorrect because there is a change in income.

Option C is correct because it accurately represents the income change as an increase of $208,300.

Reggie Corporation Manufactures a Single Product with the Following Unit