Beatbox Company reported the following results from the sale of 24,250 units of Product 123: $\begin{array} { l r }
\text { Sales } & \$ 608,000 \
\text { Variable manufacturing costs } & 388,000 \
\text { Fixed manufacturing costs } & 120,000 \
\text { Variable selling costs } & 60,000 \
\text { Fixed administrative costs } & 30,000
\end{array}$ Bongo Inc. has offered to purchase 2,000 of Product 123 at $20 each. Beatbox has available capacity, and the president is in favor of accepting the order. She feels it would be profitable because no variable selling costs will be incurred. The plant manager is opposed because the "full cost" of production is $20.95. Which of the following correctly notes the change in income if the special order is accepted?

Question

Beatbox Company reported the following results from the sale of 24,250 units of Product 123: $\begin{array} { l r } 
\text { Sales } & \$ 608,000 \
\text { Variable manufacturing costs } & 388,000 \
\text { Fixed manufacturing costs } & 120,000 \
\text { Variable selling costs } & 60,000 \
\text { Fixed administrative costs } & 30,000
\end{array}$ Bongo Inc. has offered to purchase 2,000 of Product 123 at $20 each. Beatbox has available capacity, and the president is in favor of accepting the order. She feels it would be profitable because no variable selling costs will be incurred. The plant manager is opposed because the "full cost" of production is $20.95. Which of the following correctly notes the change in income if the special order is accepted?

Quizplus · Accepted Answer

The relevant cost for analyzing the offer is the variable cost, in this case, the variable manufacturing cost of $16. There are no variable selling costs, so these are not relevant costs. Therefore, the incremental revenue is $20, and the incremental cost is $16, resulting in incremental profit per unit of $4. 
The total revenue from the special order will be $40,000 ($20 x 2,000 units), and the incremental cost will be $32,000 ($16 x 2,000 units). 
Therefore, the total incremental profit will be $8,000 ($40,000 - $32,000). Thus, the acceptance of this order will increase the income by $8,000.

Beatbox Company Reported the Following Results from the Sale of 24,250