Simple Managerial Accounting Homework Question

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I ran into this problem on my online accounting quiz and I have tried it for almost an hour; still cannot seem to get the right answer.

Midwest Company manufactures lamps. Shop Smart, a large retail merchandiser, wants to buy 200,000 lamps from Midwest Company for $12 each. The lamp would carry Shop Smart’s name and would be sold in its stores.

Midwest Company normally sells 420,000 lamps a year at $16 each; its production capacity is a total of 450,000 units a year. Cost information for the lamps is as follows:

Production costs:

Variable production costs $6 per unit

Fixed manufacturing overhead:
($2,100,000 / 420,000 units) $5 per unit



Selling and administrative expenses:

Fixed ($840,000 / 420,000 units) $2 per unit


Shop Smart has indicated that the company is not interested in signing a contract for less than 200,000 lamps. Total fixed costs will not change regardless of whether the Shop Smart order is accepted.
By how much will overall Midwest Company’s net income change if the Shop Smart order is accepted?
A) Midwest Company net income will INCREASE by $1,200,000 if the order is accepted.
B) Midwest Company net income will DECREASE by $1,200,000 if the order is accepted.
C) Midwest Company net income will INCREASE by $500,000 if the order is accepted.
D) Midwest Company net income will DECREASE by $500,000 if the order is accepted.
E) Midwest Company net income will INCREASE by $200,000 if the order is accepted.
F) Midwest Company net income will DECREASE by $200,000 if the order is accepted.

P.S. I already got the question wrong and was told by the computer that the right answer is D. I have tried to replicate the answer, but cannot seem to do it. Any help is appreciated.
 

Triest123

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I ran into this problem on my online accounting quiz and I have .

P.S. I already got the question wrong and was told by the computer that the right answer is D. I have tried to replicate the answer, but cannot seem to do it. Any help is appreciated.
=> The profit earned by selling 420,000 units at $16 per unit
= $1,260,000

Since the production capacity is 450,000 units, the spare capacity would be 30,000 unts only.

The "additional" profit earned for 30,000 units = 30,000 x ($12 - $6) = $180,000

The profit earned by selling 250,000 units at $16 & 170,000 units at $12
= $580,000

So, if the company accept the order, the profit will be decreased by
$1,260,000 - $580,000 - $180,000 = $500,000

The answer is "D"
 
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