US CMA Part 2 · Chapter 6 · Question 3 of 22
Bristow Valves normally sells a component for $40. Unit costs are: variable $24 and allocated fixed overhead $8. A customer offers to buy 5,000 units at $28 each as a one-time order. Bristow has enough idle capacity and fixed costs will not change. What is the effect of accepting the order on operating income?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Increase of $20,000
Explanation
With idle capacity, only variable costs are incremental. Incremental profit = ($28 - $24) x 5,000 = $4 x 5,000 = $20,000. The allocated fixed overhead of $8 will be incurred regardless, so comparing the price with full cost ($32) wrongly suggests a loss.
More Business decision analysis: marginal analysis and pricing MCQs
- Q5Cromwell Engines makes 10,000 valves a year. Unit costs are: direct materials $8, direct labor $6, variable overhead $4 and fixed overhead…
- Q6Using the Cromwell Engines data (relevant cost to make $20.80 per unit, purchase price $21, 10,000 units), assume that if the valves are…
- Q7Dorset Chemicals produces 8,000 gallons of Product K from a joint process costing $96,000. K can be sold at split-off for $12 per gallon…
- Q8Eldon Stores' garden segment reports sales of $600,000, variable costs of $390,000 and fixed costs of $260,000, of which $150,000 would be…
- Q9Felton Machining has a shortage of machine hours. Data per unit: Product P: contribution margin $30, 2 machine hours Product Q…