A foreign company (whose sales will not affect Thompson's market) offers to buy 4,000 units at $7.50 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300. If Thompson accepts the offer, its profits will:

a. Increase by $30,000.

b. Increase by $ 6,000.

c. Decrease by $ 6,000.

d. Increase by $ 5,200.

e. Increase by $ 4,300.

As per our research the complete question is

Thompson Company had the following results of operations for the past year:

Sales (16,000 units at $10) $160,000

Direct materials and direct labor $96,000

Overhead (20% variable) 16,000

Selling and administrative expenses (all fixed) 32,000 (144,000)

Operating income $16,000

A foreign company (whose sales will not affect Thompson's market) offers to buy 4,000 units at $7.50 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300. If Thompson accepts the offer, its profits will:

Increase by $30,000.

Increase by $ 6,000.

Decrease by $ 6,000.

Increase by $ 5,200.

Increase by $ 4,300.

Answer:

The correct answer is D. Increase by $ 4,300.

Explanation:

This problem requires us to calculate the increase in profit if the offer given in problem is accepted. This can easily be solved by subtracting, incremental cost incurred from incremental revenue earned, if offer is accepted.

The complete calculation is given below.

Incremental Revenue

=7.5*4000 = 30,000 - A

Incremental cost

Direct materials and direct labor = 96,000/16000 = 6 * 4000 = 24,000

Overhead (20% variable) = (20% * 16000) / 16000 = 0.2 * 4000 = 800

Fixed cost = 600 + 300 = 900

Total Cost = 25,700 - B

Increase in profit = A-B = $ 4300.