Aerotoy Company makes toy airplanes.One plane is an excellent replica of a 737,which sells for $5.Vacation Airlines wants to purchase 12,000 planes at $1.75 each to give to children who are flying unaccompanied.Costs per plane are as follows: No variable marketing costs would be incurred.The company is operating significantly below the maximum productive capacity.No fixed costs are avoidable.However,Vacation Airlines wants its own logo and colours on the planes.The cost of the decals is $0.01 per plane,and a special machine costing $1,500 would be required to affix the decals.After the order is complete,the machine would be scrapped.Which of the following represents the solution?
$\begin{array}{lr}
\text { Direct materials } & \$ 1.00 \
\text { Direct labour } & 0.50 \
\text { Variable overhead } & 0.10 \
\text { Fixed overhead } & 0.90
\end{array}$
A)Do not accept the order, because income will decrease by $1,500.
B)Do not accept the order, because income will decrease by $180.
C)Accept the order, because income will increase by $180.
D)Accept the order, because income will increase by $300.

Question

Quizplus · Accepted Answer

The total cost per plane is the sum of direct materials ($1.00), direct labor ($0.50), variable overhead ($0.10), and the cost of decals ($0.01), totaling $1.61. The special machine cost ($1,500) divided by 12,000 planes adds $0.125 per plane, making the total cost $1.735 per plane. Selling at $1.75 each, the profit per plane is $0.015. For 12,000 planes, the total profit is $180, thus accepting the order increases income by $180. Fixed overhead is not considered in the incremental analysis since it's not avoidable or altered by the order.

Aerotoy Company Makes Toy Airplanes A)Do Not Accept the Order, Because Income Will Decrease by of a 737,which