Question

Elkhorn, Inc., which has excess capacity, received a special order for 4,000 units at a price of $15 per unit. Currently, production and sales are anticipated to be 10,000 units without considering the special order. Budget information for the current year follows.

Sales	$	190,000
Less: Cost of Goods Sold		145,000
Gross Margin	$	45,000

Cost of goods sold includes $30,000 of fixed manufacturing cost. If the special order is accepted, the company's income will:

		increase by $2,000.
		decrease by $14,000.
		decrease by $2,000.
		increase by $14,000.
		None of the answers is correct.

Answer 1

Since it is clearly mention in question that Elkhorn, Inc. has excess capacity, It can be said that sales of 4000 addional units would not affect current sales of 10,000 units.

From production of excess 4000 units fixed cost would not increase.

Variable cost per unit: (145,000 - 30,000) / 10,000 = $ 11.5

Sales price per unit : $ 15

Profit per unit : $ (15-11.5) = $ 3.5

Profit from sale of special order of 4,000 units would be increase by $ 14,000 ( 4,000 units * $ 3.5)