Markson Company had the following results of operations for the past year: Sales ( 8 , 000 units at $ 20 ) $ 160 , 000 Variable manufacturing costs $ 86 , 000 Fixed manufacturing costs 15 , 000 Variable administrative expenses 12 , 000 Fixed selling and administrative expenses 20 , 000 ( 133 , 000 ) Operating income $ 27 , 000 \begin{array}{lrr} ext { Sales }(8,000 ext { units at } \$ 20) & & \$ 160,000 \ ext { Variable manufacturing costs } & \$ 86,000 & \ ext { Fixed manufacturing costs } & 15,000 & \ ext { Variable administrative expenses } & 12,000 & \ ext { Fixed selling and administrative expenses } & 20,000 & (133,000) \\hline ext {Operating income} & & \$ 27,000 \\hline\end{array} Sales ( 8 , 000 units at $20 ) Variable manufacturing costs Fixed manufacturing costs Variable administrative expenses Fixed selling and administrative expenses Operating income $86 , 000 15 , 000 12 , 000 20 , 000 $160 , 000 ( 133 , 000 ) $27 , 000 A foreign company offers to buy 2,000 units at $14 per unit.In addition to variable manufacturing and administrative costs,selling these units would increase fixed overhead by $1,600 for the purchase of special tools.Markson's annual productive capacity is 12,000 units.If Markson accepts this additional business,its profits will:A) Increase by $3,500.B) Decrease by $5,650.C) Decrease by $1,600.D) Increase by $1,900.E) Decrease by $5,100.

Question

Markson Company had the following results of operations for the past year:    Sales  ( 8 , 000  units at  $ 20 )  $ 160 , 000  Variable manufacturing costs  $ 86 , 000  Fixed manufacturing costs  15 , 000  Variable administrative expenses  12 , 000  Fixed selling and administrative expenses  20 , 000 ( 133 , 000 )  Operating income $ 27 , 000 \begin{array}{lrr}	ext { Sales }(8,000 	ext { units at } \$ 20)   &   &  \$ 160,000 \	ext { Variable manufacturing costs }  &  \$ 86,000  &  \	ext { Fixed manufacturing costs }  &  15,000  &  \	ext { Variable administrative expenses }  &  12,000  &  \	ext { Fixed selling and administrative expenses }  &  20,000  &  (133,000) \\hline	ext {Operating income} & & \$ 27,000 \\hline\end{array}  Sales  ( 8 , 000  units at  $20 )   Variable manufacturing costs   Fixed manufacturing costs   Variable administrative expenses   Fixed selling and administrative expenses  Operating income ​ $86 , 000 15 , 000 12 , 000 20 , 000 ​ $160 , 000 ( 133 , 000 )  $27 , 000 ​ ​   A foreign company offers to buy 2,000 units at $14 per unit.In addition to variable manufacturing and administrative costs,selling these units would increase fixed overhead by $1,600 for the purchase of special tools.Markson's annual productive capacity is 12,000 units.If Markson accepts this additional business,its profits will:A) Increase by $3,500.B) Decrease by $5,650.C) Decrease by $1,600.D) Increase by $1,900.E) Decrease by $5,100.

Precious Walters · Accepted Answer

Final Answer : D, Explanation :  To determine the impact on profits, calculate the additional revenue and costs from the special order. Additional revenue is 2,000 units at $14 each, totaling $28,000. Additional variable costs include manufacturing ($86,000 / 8,000 units = $10.75 per unit) and administrative ($12,000 / 8,000 units = $1.50 per unit), totaling $12.25 per unit for 2,000 units, or $24,500. The special tools add $1,600 in fixed costs. The net impact is $28,000 (additional revenue) - $24,500 (additional variable costs) - $1,600 (additional fixed costs) = $1,900 increase in profits.

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