Snyder,Inc. ,which has excess capacity,received a special order for 4,000 units at a price of $15 per unit.Currently,production and sales are anticipated to be 10,000 units without considering the special order.Budget information for the current year follows.
Cost of goods sold includes $30,000 of fixed manufacturing cost.If the special order is accepted,the company's income will:

Question

Snyder,Inc. ,which has excess capacity,received a special order for 4,000 units at a price of $15 per unit.Currently,production and sales are anticipated to be 10,000 units without considering the special order.Budget information for the current year follows. 
Cost of goods sold includes $30,000 of fixed manufacturing cost.If the special order is accepted,the company's income will:

Quizplus · Accepted Answer

To determine whether the special order will increase or decrease the company's income, we need to compare the incremental revenue from the special order to the incremental costs associated with it.

Incremental revenue = Price per unit x Units in the special order = $15 x 4,000 = $60,000

Incremental cost = Cost per unit x Units in the special order = (Variable manufacturing cost + Fixed manufacturing cost) x Units in the special order = (($6 + $3) x 4,000) + $30,000 = $54,000

Since the incremental revenue ($60,000) is greater than the incremental cost ($54,000), accepting the special order will increase the company's income by $6,000 (i.e. $60,000 - $54,000).

Note that the fixed manufacturing cost of $30,000 is relevant for decision-making because it represents a cost that would be incurred regardless of whether the special order is accepted or not. However, it is not relevant to the calculation of incremental cost because it is a sunk cost (i.e. a cost that has already been incurred and cannot be changed by this decision).