Incremental revenue and incremental income

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Reference no: EM1310554

Incremental revenue & incremental income (loss) associated with accepting the special order.

Colfax Manufacturing makes a single product. Budget information regarding the current period is given below:
Revenue (100,000 units at $8.00).................................... $800,000
Direct materials ................................................................ 150,000
Direct labor ....................................................................... 125,000
Variable manufacturing overhead ................................... 235,000
Fixed manufacturing overhead ........................................ 110,000
Net income...................................................................... $180,000
Speck Company approaches Colfax with a special order for 15,000 units at a price of $7.50 per unit. Variable costs will be the same as the current production and accepting the special order will not have any impact on the rest of the company's orders. However, Colfax is operating at capacity and will incur an additional $50,000 in fixed manufacturing overhead if the order is accepted.
1. What is the incremental revenue associated with accepting the special order?

a.$120,000

b.$70,000

c.$170,000

d.$112,500

2. What is the incremental income (loss) associated with accepting the special order?

a.$36,000

b.($23,500)

c.$27,000

d.($14,000)

Smith Manufacturing has 27,000 labor hours available for producing X and Y. Consider the following information:

	Product X	Product Y
Required labor time per unit (hours)	2	3
Maximum demand (units)	6,000	8,000
Contribution margin per unit	$5.00	$6.00

3. If Smith follows best managerial accounting practices, which of the following production schedules should the company set?

Huxley Sports Company sells logo sports merchandise and does custom screen printing. They are trying to decide whether or not to continue screen printing. The following information is available for the segments. Assume that all direct fixed costs could be avoided if a segment is dropped and that the total common fixed costs would remain unchanged if the screen printing were dropped.

	Screen Printing	Apparel Sales
Sales	$120,000	$420,000
Variable Costs	72,000	220,000
Contribution Margin	$48,000	$200,000
Direct Fixed Costs	32,000	70,000
Allocated Common Fixed costs	20,000	70,000
Net Income	($4,000)	$60,000

4. If screen printing is dropped, apparel sales will be unaffected. All direct fixed costs associated with screen printing will be eliminated. What will the effect on overall profits be if the segment is eliminated?

a.Overall profits will increase $4,000

b.Overall profits will decrease by $48,000

c.Overall profits will decrease by $16,000

d.Overall profits will decrease by $120,000

5. Assume that more space will be allocated to apparel sales if screen printing is dropped. This will allow apparel sales to increase by 25%. What is the impact on profits of a 25% increase in apparel sales (ignoring the loss of the screen printing business)?

a.Profits will increase by $105,000

b.Profits will increase by $50,000

c.Profits will increase by $32,500

d.Profits will increase by $15,000

Reference no: EM1310554

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