Thompson Company had the following results of operations for the past year: $$\begin{array} { l r r }
\text { Sales } ( 16,000 \text { units at } \$ 10 ) && \$ 160,000 \
\text { Direct materials and direct labor } & \$ 96,000 & \
\text { Overhead (20\% variable) } & 16,000 \
\text { Selling and administrative expenses (all fixed) } &\underline { 3 2 , 0 0 0 } & \underline { ( 144,000 ) }\
\text { Operating income } && \underline { \$ 16,000}
\end{array}$$ A foreign company (whose sales will not affect Thompson's market)offers to buy 4,000 units at $7.50 per unit.In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300.If Thompson accepts the offer, its profits will:
A)Increase by $30,000
B)Increase by $ 6,000
C)Decrease by $ 6,000
D)Increase by $ 5,200
E)Increase by $ 4,300

Question

Thompson Company had the following results of operations for the past year: $$\begin{array} { l r r } 
\text { Sales } ( 16,000 \text { units at } \$ 10 ) && \$ 160,000 \
\text { Direct materials and direct labor } & \$ 96,000 & \
\text { Overhead (20\% variable) } & 16,000 \
\text { Selling and administrative expenses (all fixed) } &\underline { 3 2 , 0 0 0 } & \underline { ( 144,000 ) }\
\text { Operating income } && \underline { \$ 16,000}
\end{array}$$ A foreign company (whose sales will not affect Thompson's market)offers to buy 4,000 units at $7.50 per unit.In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300.If Thompson accepts the offer, its profits will:
A)Increase by $30,000
B)Increase by $ 6,000
C)Decrease by $ 6,000
D)Increase by $ 5,200
E)Increase by $ 4,300

Quizplus · Accepted Answer

The contribution margin per unit is $4 ($10 - $6 variable cost). For the special order, the selling price is $7.50, so the contribution margin is $1.50 per unit. For 4,000 units, this is $6,000. Subtract the additional fixed costs of $900 ($600 + $300), resulting in a profit increase of $5,100. However, the correct calculation should be $6,000 - $900 = $5,100, which matches option E.

Thompson Company Had the Following Results of Operations for the Past