Wollongong Company Has a Current Production Level of 20 000

question 211

Multiple Choice

Wollongong Company has a current production level of 20 000 units per month.Unit costs at this level are:
$$\begin{array} { l r } \text { Direct materials } & \$ 0.25 \\\text { Direct labour } & 0.40 \\\text { Variable overhead } & 0.15 \\\text { Fixed overhead } & 0.20 \\\text { Marketing - fixed } & 0.20 \\\text { Marketing/distribution - variable } & 0.40\end{array}$$
Current monthly sales are 18 000 units.Jim Company has contacted Wollongong Company about purchasing 1500 units at $2.00 each.Current sales would not be affected by the one-time-only special order and variable marketing/distribution costs would not be incurred on the special order.What is Wollongong Company's change in operating profits if the special order is accepted?

• A)$400 increase in operating profits
• B)$1800 decrease in operating profits
• C)$1800 increase in operating profits
• D)$400 decrease in operating profits

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Definitions:

Short-term Capital Loss

A loss realized from the sale or exchange of a capital asset held for one year or less.

Long-term Capital Gain

Profit from the sale of an asset held for more than one year, typically taxed at a lower rate than regular income.

Section 1245

A section of the tax code that involves recapturing depreciation on certain types of property as ordinary income upon sale.

Section 1231 Gain

A gain from the sale or exchange of property used in a business, subject to favorable tax treatment under Section 1231 of the U.S. tax code.