Thompson Company Had the Following Results of Operations for the Past

question 55

Multiple Choice

Thompson Company had the following results of operations for the past year: $$\begin{array} { l r r } \text { Sales } ( 16,000 \text { units at } \$ 10 ) && \$ 160,000 \\\text { Direct materials and direct labor } & \$ 96,000 & \\\text { Overhead (20\% variable) } & 16,000 \\\text { Selling and administrative expenses (all fixed) } &\underline { 3 2 , 0 0 0 } & \underline { ( 144,000 ) }\\\text { Operating income } && \underline { \$ 16,000}\end{array}$$ A foreign company (whose sales will not affect Thompson's market) offers to buy 4,000 units at $7.50 per unit.In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300.If Thompson accepts the offer, its profits will:

• A)Increase by $30,000
• B)Increase by $ 6,000
• C)Decrease by $ 6,000
• D)Increase by $ 5,200
• E)Increase by $ 4,300

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Definitions:

Corporate Stock

Equity securities representing ownership shares in a corporation, entitling shareholders to dividends and a claim on assets and earnings.

Reacquired

Refers to the action of a company purchasing back its own shares or securities from investors.

Cost Method

An accounting method used for investments, where the investment is recorded at acquisition cost without recognizing its undistributed earnings.

Treasury Stock

Shares of a company's own stock that it has reacquired from shareholders and holds in its treasury for future use.