It costs Concord Corporation $28 of variable costs and $16 of allocated fixed costs to produce an industrial trash can that sells for $82. A buyer in Mexico offers to purchase 3000 units at $33 each. Concord Corporation has excess capacity and can handle the additional production. What effect will acceptance of the offer have on net income?
Solution :
If concord corporation accept the offer there will be an increase in income :
Incremental Income = Incremental Revenue - Incremental Costs
= (3,000 * $ 33) + (3,000 * $ 28)
= $ 99,000 - 84,000
= $ 15,000
If concord corporation accept the offer, income will increase by $ 15,000.
Note : Allocated OH are fixed in nature and not directly incurred by product and therefore are irrelevant for decision making.
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It costs Concord Corporation $28 of variable costs and $16 of allocated fixed costs to produce...