Termus Industries is operating at 85% of its manufacturing capacity of 50,000 product units per year. A customer has offered to buy an additional 4,000 units at $25 each and sell them outside the country so as not to compete with Termus. The following data are available:

In producing 4,000 additional units, fixed overhead costs would remain at their current level but incremental variable overhead costs of $4 per unit would be incurred. What is the effect on income if Termus accepts this order?

Question

Termus Industries is operating at 85% of its manufacturing capacity of 50,000 product units per year. A customer has offered to buy an additional 4,000 units at $25 each and sell them outside the country so as not to compete with Termus. The following data are available: 
 
In producing 4,000 additional units, fixed overhead costs would remain at their current level but incremental variable overhead costs of $4 per unit would be incurred. What is the effect on income if Termus accepts this order?

Quizplus · Accepted Answer

The additional revenue from selling 4,000 units at $25 each would be $100,000 ($25 x 4,000). The incremental variable costs to produce these units would be $16,000 ($4 x 4,000). However, fixed overhead costs would remain the same, as the company is not increasing its production capacity.

Therefore, the net income from accepting this order would be $84,000 ($100,000 - $16,000). This results in an increase of $3 per unit ($84,000 / 4,000 units). Thus, the best choice is E, income will increase by $3 per unit.

Termus Industries Is Operating at 85% of Its Manufacturing Capacity