The Normal Selling Price of Our Product Is $42 Per

question 76

Multiple Choice

The normal selling price of our product is $42 per unit. The costs of production are direct materials, $8; direct labor, $6; variable overhead, $7; and fixed overhead, $4 (based on normal capacity) . The company has received a special order for 11,900 units at a unit sales price of $23. There is ample unused capacity to fill the order and $1 per unit will be incurred for additional freight costs. If the order is accepted, operating income will

• A) increase by $11,900.
• B) decrease by $35,700.
• C) increase by $23,800.
• D) decrease by $23,800.

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Definitions:

Average Variable Cost

Average Variable Cost is the variable cost per unit of output, calculated by dividing total variable costs by total output, illustrating how variable costs change with output levels.

Output

The total amount of goods or services produced by a person, machine, factory, country, etc., within a particular time period.

Marginal Product

The additional output generated by employing one more unit of a factor of production.

Output Level

The total quantity of goods and services that a firm or industry produces over a set period.