Question

Rylan Corporation received an offer from an exporter for 25,000 units of product at $16 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available:

Domestic unit sales price	$22
Unit manufacturing costs:
Variable	11
Fixed	6

What is the differential cost from the acceptance of the offer?

a.$550,000

b.$275,000

c.$125,000

d.$150,000

Answer 1

Price of the units produced for the special order = $16 / unit

Variable cost of producing a unit are = $11 / unit

Number of units of order = 25,000 units

Differential Cost = 25,000 units * $11/unit = $275,000

Fixed costs are irrelevant because acceptance of an offer from the exporter will not affect the normal production or domestic sales price. Fixed cost does not change for a level of activity. So fixed costs are relevant because they will not change till the company is well within the normal capacity of production

Differential cost = $275,000

Option 'B' is correct