Kansas Company Uses Activity-Based Costing A Total of 500 Setups at a Cost of $120

question 8

Multiple Choice

Kansas Company uses activity-based costing.The company produces and sells 20,000 units at $22 per unit.Kansas Company's product cost is calculated as follows:
$$\begin{array} { l l } \text { Variable costs } & \$ 10 \text { per unit } \\\text { Fixed costs } & \$ 2 \text { per unit } \\\text { Setup costs } & \$ 3 \text { per unit } \\\text { Total costs } & \$ 15 \text { per unit }\end{array}$$
A total of 500 setups at a cost of $120 per setup are required to produce the 20,000 units.Kansas Company has received a special order to sell 5,000 units at $12 per unit.Kansas Company has excess capacity available,but these 5,000 units would require 60 setups.If Kansas Company accepts the special order,what is the increase or decrease in net income?

• A) $0
• B) decrease $5,000
• C) decrease $15,000
• D) increase $2,800

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Definitions:

Interest Charges

Interest charges are the costs incurred by an entity for borrowing money, quantified as a percentage of the principal loan amount.

Assets

Economic resources or owned items of value that an individual, corporation, or country possesses, expected to provide future benefits.

Net Income

Net income refers to the total earnings of a company once all costs, expenses, and taxes are deducted from the overall revenue.

Debt-to-Total-Assets Ratio

The debt-to-total-assets ratio measures the percentage of a company's assets financed by creditors, indicating the degree of financial leverage.