Answer :
To determine how the net income of Tarazz Company will change if they accept the special order, let's go through the cost analysis step-by-step:
1. Understand the Costs Involved:
- Direct materials: \[tex]$48 - Direct labor: \$[/tex]64
- Variable manufacturing overhead: \[tex]$48 - Fixed manufacturing overhead: \$[/tex]32
This gives us a total cost per unit of \[tex]$192, which includes both variable and fixed costs. 2. Calculate the Variable Cost per Unit: Since fixed manufacturing overhead is constant and does not change with the number of units produced, we should only consider variable costs when evaluating the special order. \[ \text{Variable cost per unit} = \text{Direct materials} + \text{Direct labor} + \text{Variable manufacturing overhead} \] \[ \text{Variable cost per unit} = \$[/tex]48 + \[tex]$64 + \$[/tex]48 = \[tex]$160 \] 3. Special Order Details: - Number of computers in special order: 500 - Special order price per unit: \$[/tex]175
4. Contribution Margin:
The contribution margin per unit is the difference between the special order price per unit and the variable cost per unit.
[tex]\[ \text{Contribution margin per unit} = \text{Special order price per unit} - \text{Variable cost per unit} \][/tex]
[tex]\[ \text{Contribution margin per unit} = \$175 - \$160 = \$15 \][/tex]
5. Total Contribution Margin for the Special Order:
The total contribution margin for the special order is the contribution margin per unit multiplied by the number of units in the special order.
[tex]\[ \text{Total contribution margin} = \text{Contribution margin per unit} \times \text{Special order units} \][/tex]
[tex]\[ \text{Total contribution margin} = \$15 \times 500 = \$7500 \][/tex]
6. Change in Net Income:
Since we are only considering variable costs and the fixed manufacturing overhead remains unchanged, the total contribution margin for the special order directly represents the change in net income.
[tex]\[ \text{Change in net income} = \$7500 \][/tex]
Therefore, if the order is accepted, the company's net income will INCREASE by \$7,500.
1. Understand the Costs Involved:
- Direct materials: \[tex]$48 - Direct labor: \$[/tex]64
- Variable manufacturing overhead: \[tex]$48 - Fixed manufacturing overhead: \$[/tex]32
This gives us a total cost per unit of \[tex]$192, which includes both variable and fixed costs. 2. Calculate the Variable Cost per Unit: Since fixed manufacturing overhead is constant and does not change with the number of units produced, we should only consider variable costs when evaluating the special order. \[ \text{Variable cost per unit} = \text{Direct materials} + \text{Direct labor} + \text{Variable manufacturing overhead} \] \[ \text{Variable cost per unit} = \$[/tex]48 + \[tex]$64 + \$[/tex]48 = \[tex]$160 \] 3. Special Order Details: - Number of computers in special order: 500 - Special order price per unit: \$[/tex]175
4. Contribution Margin:
The contribution margin per unit is the difference between the special order price per unit and the variable cost per unit.
[tex]\[ \text{Contribution margin per unit} = \text{Special order price per unit} - \text{Variable cost per unit} \][/tex]
[tex]\[ \text{Contribution margin per unit} = \$175 - \$160 = \$15 \][/tex]
5. Total Contribution Margin for the Special Order:
The total contribution margin for the special order is the contribution margin per unit multiplied by the number of units in the special order.
[tex]\[ \text{Total contribution margin} = \text{Contribution margin per unit} \times \text{Special order units} \][/tex]
[tex]\[ \text{Total contribution margin} = \$15 \times 500 = \$7500 \][/tex]
6. Change in Net Income:
Since we are only considering variable costs and the fixed manufacturing overhead remains unchanged, the total contribution margin for the special order directly represents the change in net income.
[tex]\[ \text{Change in net income} = \$7500 \][/tex]
Therefore, if the order is accepted, the company's net income will INCREASE by \$7,500.
