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21 March, 09:17

A foreign company (whose sales will not affect cornish's market) offers to buy 3,000 units at $17.00 per unit. in addition to variable manufacturing costs, selling these units would increase fixed overhead by $500 and selling and administrative costs by $1,000. if cornish accepts the offer, its profits will:

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  1. 21 March, 09:30
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    Trescott company had the following results of operations for the past year:

    Sales (20,000 units at $22) $440,000

    Direct materials and direct labor $200,000

    Overhead (40% variable) 100,000

    Selling and Administrative expenses (all fixed) 92,000 (392,000)

    Operating income $ 48,000

    A foreign company (whose sales will not affect Trescott's market) offers to buy 3,000 units at $17.00 per unit. In addition to the variable manufacturing costs, selling these units would increase fixed overhead by $500 and selling and administrative costs by $1,000. If Trescott accepts the offer, its profits will increase (decrease) by:

    Answer : If Cornish accepts this order, its profits will increase by $13,500.

    Calculation of Variable Costs per unit:

    Direct Material and labor per unit = Total Direct Material and labor / No. of units sold

    Direct Material and labor per unit = 200000/20000 = $10

    Variable Overhead per unit = Total Variable Overhead / No. of units sold

    Variable Overhead per unit = (100000*0.4) / 20000 = $2

    Variable Cost per unit = $12 (Direct Material and labor per unit + Variable Overhead per unit)

    Selling price of new order = $17 per unit

    No. of units = 3,000

    Increase in Fixed Costs = Inc in fixed overhead + inc in S&A Expenses

    Increase in Fixed Costs = $1500 (500 + 1000)

    Total Cost of new order = (Variable Cost per unit * No. of units) + Increased Fixed Cost

    Total Cost of new order = (12*3000) + 1500 = $37,500

    Total Revenues from new order = Selling price per unit * No. of units sold

    Total Revenues = $51,000 (17 * 3,000)

    Profit from new order = Total Revenues from new order - Total Cost of new order

    Profit from new order = 51000 - 37500 = $13,500
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