Incremental Analysis - Accepting a Special Order

question 71

Essay

Incremental analysis - accepting a special order
Essential Company normally produces and sells 4,000 video monitors for personal computers each month.Variable manufacturing costs amount to $62 per unit,and fixed manufacturing costs are $170,000 per month.The regular sales price of the monitors is $140 per unit.The company is considering a special order from a foreign computer maker to buy an additional 1,000 monitors per month at a special price of $70 per unit.Filling this special order would not affect Essential Company's regular sales volume or fixed manufacturing costs.
(a)The average cost per unit at the 4,000-unit-per-month production level is $________ per unit.
(b)The average cost per unit at the 5,000-unit-per-month production level is $________ per unit.
(c)The amount of increase or decrease (indicate the correct term)in Essential Company's operating income that would result from accepting the special order is $________.

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Definitions:

Acquisition Cost

is the total cost incurred to acquire an asset, investment, or property, which includes the purchase price and all associated expenses.

Common Stock

A type of security that represents ownership in a corporation, giving holders voting rights and a share in the company's profits via dividends.

Cash Purchase

A transaction method in which goods or services are paid for in full with cash at the time of purchase.

Incremental Value

Incremental value refers to the additional or extra value generated by undertaking a specific action or investment compared to not doing so.