Homework Answers
Capacity = 50,000 units
Currently producing = 45,000 units
Vacant capacity = 50,000 - 45,000 = 5,000 units
If order of 7000 units accepted while there is only vacant
capacity of 5,000 units which results in loss of normal sales of
2000 units.
Relevant cost for 5000 units fulfilled using vacant capacity:
Direct material = $20
Direct labor = $10
Var. overhead = $6
Total relevant cost = $36
Selling price = $45
Gain on 5000 units from vacant capacity = ($45 - $36) * 5000 =
$45,000
Loss of contribution on 2,000 units = ($50 - $45) * 2000 =
$10,000
Net Gain on accepting the order = ($45,000 - $10,000) = $35,000
Hence answer is D). Increase by $35,000
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