The following information relates to a product produced by Malkovich Company: Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although production
Capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product normally sells for $120 each. A customer has offered to buy 60,000 units for $90 each.
If the firm produces the special order, the effect on income would be a
A) $360,000 increase.
B) $360,000 decrease.
C) $540,000 decrease.
D) $540,000 increase.

Question

The following information relates to a product produced by Malkovich Company:  Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although production
Capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product normally sells for $120 each. A customer has offered to buy 60,000 units for $90 each.
If the firm produces the special order, the effect on income would be a
A) $360,000 increase. 
B) $360,000 decrease. 
C) $540,000 decrease. 
D) $540,000 increase.

Quizplus · Accepted Answer

If the company accepts the special order, it will generate additional revenue of:

60,000 units * $90 per unit = $5,400,000

However, the cost of producing these units is:

400,000 units (expected production) + 60,000 units (special order) = 460,000 units

Fixed selling costs per unit = $500,000 / 400,000 units = $1.25
Variable selling costs per unit = $12

Total variable cost per unit = $1.25 + $12 = $13.25

Total cost of producing 60,000 units = 60,000 units * $13.25 per unit = $795,000

Therefore, the contribution margin per unit for the special order is:

$90 - $13.25 = $76.75

The overall increase in income would be:

($76.75 contribution margin per unit * 60,000 units) - $795,000 = $360,000

So the correct answer is D, a $540,000 increase in income if the firm produces the special order.

The Following Information Relates to a Product Produced by Malkovich