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A special order of 5,000 units at $36 each carries a variable manufacturing cost of $25 per unit and a tariff of $800 on the batch, with spare capacity available. What income does accepting it add?
A$55,000
B$180,000
C$125,000
D$54,200
Answer & Solution
Correct answer: D. $54,200
1. Revenue from the order is 5,000 units times $36, which is $180,000.
2. Variable production cost is 5,000 units times $25, which is $125,000.
3. The tariff adds a further $800 on the batch.
4. Total relevant costs are $125,000 plus $800, which is $125,800.
5. Income added is $180,000 minus $125,800, which is $54,200.
6. Rejecting the order brings in no revenue and no variable cost, so the whole $54,200 would be forgone.
7. $55,000 drops the tariff, which is a real incremental cost of taking the order.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 9.7 Accept Business at Reduced Price_
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