Termus Industries Is Operating at 85% of Its Manufacturing Capacity

question 71

Multiple Choice

Termus Industries is operating at 85% of its manufacturing capacity of 50,000 product units per year.A customer has offered to buy an additional 4,000 units at $25 each and sell them outside the country so as not to compete with Termus.The following data are available: $\begin{array}{lrr}\text { Costs at 85\%/ capacity: } & { \text { Per } } & \\& \text { Urit } & \text { Total } \\\text { Direct materials } & \$ 10.00 & \$ 425,000 \\\text { Direct labor } & 8.00 & 340,000 \\\text { Overhead (fixed and variable) } & \underline{13.00} & \underline{552,500} \\\text { Totals } & \underline{\$ 31.00 }& \underline{\$ 1,317,500}\end{array}$ In producing 4,000 additional units, fixed overhead costs would remain at their current level but incremental variable overhead costs of $4 per unit would be incurred.What is the effect on income if Termus accepts this order?

• A)Income will decrease by $6 per unit.
• B)Income will increase by $6 per unit.
• C)Income will increase by $7 per unit.
• D)Income will decrease by $3 per unit.
• E)Income will increase by $3 per unit.

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Definitions:

Promissory Note

A financial instrument in which one party promises in writing to pay a determinate sum of money to the other.

Monthly Installment

A fixed payment made every month over a set period to repay a debt.

Accounting Equation

The fundamental formula in accounting that represents the relationship between an entity's assets, liabilities, and equity (Assets = Liabilities + Equity).

Liabilities

Financial obligations or debts that a company owes to others, payable in money, goods, or services.