Question

Martinez Manufacturing has an annual capacity of 81,000 units per year. Currently, the company is making...

Martinez Manufacturing has an annual capacity of 81,000 units per year. Currently, the company is making and selling 78,800 units a year. The normal sales price is $102 per unit, variable costs are $70 per unit, and total fixed expenses are $2,000,000. An out-of-state distributor has offered to buy 6,000 units at $75 per unit. Martinez's cost structure should not change as a result of this special order.

By how much will Martinez's income change if the company accepts this order?

Martinez’ net income will (increase/decrease) by $_____ if it accepts this special offer.

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Answer #1
Variable Income Statement
Particulars original special order
Sales   8037600 8100000
less ; Variable costs 5516000 5670000
Contribution Margin 2521600 2430000
less ; Fixed costs 2000000 2000000
net operating income 521600 430000

Workings

at present Sales Revenue

= 78800 * 102

= $ 8037600

Variable Cost = 78800 * 70

= $ 5516000

net income

= Sales Revenue - Variable Cost - Fixed Cost

= 8037600 - 5516000 - 2000000

= $ 521600

if company Accepts order Sale revenue

= ( 6000 * 75 ) + ( ( 81000 - 6000 ) * 102 )

= 450000 + 7650000

= $ 8100000

Variable Cost = 81000 * 70

= $ 5670000

Net income = 8100000 - 5670000 - 2000000

= $ 430000

Company net income will Decrease by ( 521600 - 430000 ) $ 91600 if company Accepts the order

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