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Multiple Choice QuestionA company receives a special order of 10,000 units of product. The potential customer is willing to pay $0.75 per unit. Current sales are $90,000 and current costs are $75,000 for 90,000 units. If the order is accepted, costs will increase to $82,000. If the company has the capacity to accept the order without affecting current sales, the company should:Multiple choice question.reject the order, because income will decrease by $500reject the order, because the sales price of $0.75 per unit is less than current costs of $0.83 per unitaccept the order, because income will increase by $500accept the order, because sales will increase by $7,500

Question

Multiple Choice QuestionA company receives a special order of 10,000 units of product. The potential customer is willing to pay 0.75perunit.Currentsalesare0.75 per unit. Current sales are 90,000 and current costs are 75,000for90,000units.Iftheorderisaccepted,costswillincreaseto75,000 for 90,000 units. If the order is accepted, costs will increase to 82,000. If the company has the capacity to accept the order without affecting current sales, the company should:Multiple choice question.reject the order, because income will decrease by 500rejecttheorder,becausethesalespriceof500reject the order, because the sales price of 0.75 per unit is less than current costs of 0.83perunitaccepttheorder,becauseincomewillincreaseby0.83 per unitaccept the order, because income will increase by 500accept the order, because sales will increase by $7,500

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Solution

To answer this question, we first need to calculate the current cost per unit and the cost per unit if the special order is accepted.

  1. Current cost per unit = Total current costs / Total current units = 75,000/90,000units=75,000 / 90,000 units = 0.83 per unit

  2. Cost per unit if the order is accepted = Total costs if order is accepted / Total units if order is accepted = 82,000/(90,000units+10,000units)=82,000 / (90,000 units + 10,000 units) = 0.82 per unit

The potential customer is willing to pay 0.75perunit,whichislessthanthecurrentcostperunit(0.75 per unit, which is less than the current cost per unit (0.83) but more than the cost per unit if the order is accepted ($0.82).

Now, let's calculate the income if the order is accepted:

  1. Income from the special order = Price per unit * Number of units = 0.75∗10,000units=0.75 * 10,000 units = 7,500

  2. Total income if the order is accepted = Current sales + Income from the special order = 90,000+90,000 + 7,500 = $97,500

  3. Total costs if the order is accepted = $82,000

  4. Net income if the order is accepted = Total income if the order is accepted - Total costs if the order is accepted = 97,500−97,500 - 82,000 = $15,500

The current net income is 90,000−90,000 - 75,000 = 15,000.Iftheorderisaccepted,thenetincomewillincreaseby15,000. If the order is accepted, the net income will increase by 500 (15,500−15,500 - 15,000).

Therefore, the company should accept the order, because income will increase by $500.

This problem has been solved

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