Carmine Company Uses 4,000 Units of a Product Each Year

question 71

Multiple Choice

Carmine Company uses 4,000 units of a product each year. The cost of manufacturing one unit at this volume is as follows: $\begin{array}{lr}\text { Direct materials } & \$ 10.00 \\\text { Direct labor } & 14.00 \\\text { Variable overhead } & 5.00 \\\text { Fixed overhead } & 3.00 \\\text { Total } & \$ 32.00\end{array}$ An outside supplier has offered to sell Carmine Company unlimited quantities at a unit cost of $30.00. If Carmine Company accepts this offer, it can eliminate 50 percent of the fixed costs assigned to the product. Furthermore, the space devoted to the manufacture of the product would be rented to another company for $18,000 per year. If Carmine Company accepts the offer of the outside supplier, annual profits will:

• A)increase by $26,000.
• B)increase by $16,000.
• C)increase by $20,000.
• D)decrease by $20,000.

---

Definitions:

Marginal Cost

The outgoings involved in creating one more unit of a product or service.

Price Discrimination

Involves selling the same product to different customers at different prices based on what each is willing to pay, rather than differences in production cost.

Price Discrimination

The practice of charging different prices for the same product or service to different consumers, based on what each is willing to pay.

Senior Citizens

Individuals of an advanced age, often defined as being 65 years old or older, who may have different social, economic, and healthcare needs.