The David Corp

question 115

Multiple Choice

The David Corp. makes and sells 50,000 suitcases each year. The total fixed costs are $1,000,000. It has variable labor costs of $25 per unit; direct materials costs of $40 per unit; and variable overhead costs of $15 per unit. Its normal selling price is $120 per item. Assuming it does not have a capacity problem, what would be the effect on profits of accepting a special order of 10,000 suitcases, at a price of $90 per suitcase?

• A) Profits would decrease by $100,000
• B) Profits would increase by $100,000
• C) Profits would increase by $250,000
• D) Profits would decrease by $250,000

Understand the financial impact of writing off bad debts using the direct write-off method on net income and total assets.

Apply aging of accounts receivable method to estimate bad debts expense.

Recognize the procedural differences and financial implications of writing off bad debts under the allowance method.

Account for the recovery of previously written-off bad debts.

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Definitions:

Real Rate

The interest rate that has been adjusted to remove the effects of inflation, reflecting the true cost of borrowing.

Nominal Rate

The interest rate before adjustments for inflation, often referred to in the context of loans and savings.

Rate Of Inflation

The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.

Supply And Demand

The relationship between the quantity of a commodity available and the desire for that commodity, determining its market price.