Reggie Ltd. manufactures a single product with the following unit costs for 1,000 units: Recently, a company approached Reggie Ltd. about buying 100 units for £5,100 each. Currently, the models are sold to dealers for £7,800. Reggie Ltd.'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 Ltd. manufactures a single product with the following unit costs for 1,000 units: Recently, a company approached Reggie Ltd. about buying 100 units for £5,100 each. Currently, the models are sold to dealers for £7,800. Reggie Ltd.'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 change in income, we need to compare the profit earned from selling 1000 units to the profit earned from selling 1000 units plus the additional 100 units from the special order.

Profit from selling 1000 units at £7,800 each = (7,800-4,200)*1000 = £3,600,000

Profit from selling 100 extra units at £5,100 each = (5,100-4,200)*100 = £90,000

Total profit from selling 1100 units = £3,690,000

Profit from selling 1100 units at £4,200 each = (4,200-3,500)*1100 = £770,000

Therefore, accepting the special order would increase income by £90,000.