Markson Company had the following results of operations for the past year: Sales (8,000 units at $20.80) $166,400
Variable manufacturing costs $89,200
Fixed manufacturing costs 15,800
Variable administrative expenses 15,200
Fixed selling and administrative expenses 20,800 (141,000 )
Operating income $25,400

A foreign company whose sales will not affect Markson's market offers to buy 2,000 units at $15.20 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $1,680 for the purchase of special tools. Markson's annual productive capacity is 12,000 units. If Markson accepts this additional business, its profits will:

Solution :

The cost of variable manufacturing is given as = $ 89,200

Number of units = 8000 units.

Therefore, the cost of variable manufacturing per unit

                                                                                          = $ 11.15

Therefore for 2000 units = 2000 x 11.15

                                          = $ 22,300

                                                                            Amounts in $  

Sales                                                                    30,400 (2000 x 15.20)

Less : variable manufacturing cost                     22,300

Less : fixed manufacturing cost                           1,680

Less : variable selling and administrative cost    3800

Profit                                                                       2620

Therefore the profit is increased by $ 2620.

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