Australia Company manufactures sonars for fishing boats.Model 70 sells for $250.Australia produces and sells 5,600 of them per year.Cost data are as follows:
$$\begin{array} { | l | r | l|}
\hline \text { Variable manufacturing } & \$ 115 &\text { per unit } \
\hline \text { Variable selling and administrative } & \$ 17 &\text { per unit } \
\hline \text { Fixed manufacturing } & \$ 290,000 &\text { per year } \
\hline \text { Fixed selling and administrative } & \$ 170,000 &\text { per year } \
\hline
\end{array}$$ A potential deal has come up for a one-time sale of 32 units at a special price of $120 per unit.The marketing manager states that the sale will not negatively impact the company's regular sales activities and will require the normal variable manufacturing costs and selling and administrative costs.The production manager states that there is plenty of excess capacity and the deal will not impact fixed costs.The controller points out,however,that because the expected increase in revenues are equal to the expected increase in costs to fill the order,the deal will not have any impact on the bottom line.The controller is correct in his statement.

Question

Australia Company manufactures sonars for fishing boats.Model 70 sells for $250.Australia produces and sells 5,600 of them per year.Cost data are as follows:
 $$\begin{array} { | l | r | l|} 
\hline \text { Variable manufacturing } & \$ 115 &\text { per unit } \
\hline \text { Variable selling and administrative } & \$ 17 &\text { per unit } \
\hline \text { Fixed manufacturing } & \$ 290,000 &\text { per year } \
\hline \text { Fixed selling and administrative } & \$ 170,000 &\text { per year } \
\hline
\end{array}$$ A potential deal has come up for a one-time sale of 32 units at a special price of $120 per unit.The marketing manager states that the sale will not negatively impact the company's regular sales activities and will require the normal variable manufacturing costs and selling and administrative costs.The production manager states that there is plenty of excess capacity and the deal will not impact fixed costs.The controller points out,however,that because the expected increase in revenues are equal to the expected increase in costs to fill the order,the deal will not have any impact on the bottom line.The controller is correct in his statement.

Quizplus · Accepted Answer

The controller's statement is incorrect because the expected increase in revenues from the sale of 32 units at $120 per unit would not cover the variable costs associated with producing and selling those units. The variable costs per unit ($115 for manufacturing + $17 for selling and administrative) total $132, which is higher than the selling price of $120 per unit. Therefore, the deal would result in a loss on each unit sold, negatively impacting the bottom line.

Australia Company Manufactures Sonars for Fishing Boats A Potential Deal Has Come Up for a One-Time Sale