Marx Company has a current production capacity level of 200,000 units per month. At this level of production, variable costs are $0.50 per unit and fixed costs are $0.50 per unit. Current monthly sales are 183,000 units. Heaven Company has contacted Marx Company about purchasing 15,000 units at $1.00 each. Current sales would not be affected by the special order and no additional fixed costs would be incurred on the special order. Marx Company's change in profits if the order is accepted will be:

Effect on income= 7,500 increase

Explanation:

Giving the following information:

Variable costs are $0.50 per unit.

Current monthly sales are 183,000 units.

Heaven Company has contacted Marx Company about purchasing 15,000 units at $1.00 each.

Because it is a special offer and there is unused capacity, we will not take into account the fixed costs.

Sales= 15,000*1= 15,000

Variable cost= 15,000*0.5= (7,500)

Effect on income= 7,500 increase

Increase of $7,500

Explanation:

Consider the Incremental Costs and revenues arising from acceptance of the offer.

Note : Fixed Costs will not increase as the offer is within the capacity of Marx Company and are therefore irrelevant for this decision.

Sales(15,000×$1.00)                             $15,000

Less variable costs (15,000×$0.50)    ($7,500)

Net Income                                            $7,500

Therefore an increase of $7,500 is expected in profits if Marx Company accepts the order

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