Markson Company had the following results of operations for the past year Sales
ID: 2438449 • Letter: M
Question
Markson Company had the following results of operations for the past year Sales (8,000 units at $20) Variable manufacturing costs Pixed manufacturing costs Variable selling and administrative expenses Pixed selling and administrative expenses Operating income s 160,000 $86,000 15,000 12,000 20,000 (133,000) $ 27,000 A foreign company whose sales will not affect Markson's market offers to buy 2.000 units at $14 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $1,600 for the purchase of special tools. Markson's annual productive capacity ls 12,000 units. Markson accepts this additional business, its profits will
Explanation / Answer
(1) The first thing we need to check in type of " accepting or rejecting an offer " is ....... spare capacity. The offer is for 2000 units and we have 4000 units of spare capacity. So there is no oppurtunity cost.
(2) All fixed costs except those associated with this special offer ( 1600 for special tools in the give case ) are irrelavent costs or sunk costs.
(3) Generally, all variable costs are treated as relavent costs. But the questions says that in addition to variable manufacturing cost there are no other variable costs relevant to this decision. Hence we ignore variable selling and administrative cost.
Solution
Alternative & for additional knowledge only
Note .......... If Selling and administrative overhead is considered as relevant cost
The answer will be ......... 4900 - 12000 * 2000 / 8000 = 1900
Let me know ......... how my work helped you...... good day
Revenue = 2000 * 14 28000 (-) Relevant cost Variable manufacuring cost 21500 Fixed Overhead 1600 23100 Profit will increase by 4900