Question 1

Falcon Co. produces a single product. Its normal selling price is $27 per unit. The variable costs are $17 per unit. Fixed costs are $20,400 for a normal production run of 5,000 units per month. Falcon received a request for a special order that would not interfere with normal sales. The order was for 1,340 units with a special price of $19 per unit. Falcon has the capacity to handle the special order, and for this order, a variable selling cost of $2 per unit would be eliminated.

If the order is accepted, what would be the impact on net income?

a.increase of $5,360

b.decrease of $3,216

c.increase of $4,288

d.increase of $6,968

Question 2

Starling Co. is considering disposing of a machine with a book value of $22,500 and estimated remaining life of five years. The old machine can be sold for $5,700. A new high-speed machine can be purchased at a cost of 74,300. It will have a useful life of five years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $22,700 to $21,000 if the new machine is purchased. The differential effect on income for the new machine for the entire five years is

a.decrease of $78,130

b.increase of $60,100

c.increase of $78,130

d.decrease of $60,100