1)ABC Industries currently manufactures and sells 20,000 power saws per month, although it has the capacity to produce 35,000 units per month. At the 20,000-unit-per-month level of production, the per-unit cost is $65, consisting of $40 in variable costs and $25 in fixed costs. ABC sells its saws to retail stores for $80 each. BBC Distributors has offered to purchase 5,000 saws per month at a reduced price. ABC can manufacture these additional units with no change in its present level of fixed manufacturing costs.

Assume that BBC Distributors offers to purchase the additional 5,000 saws at a price of $47 per unit. If ABC accepts this price, ABC' monthly gross profit on sales of power saws will:

Multiple Choice

• Increase by $185,000.
• Increase by $35,000.
• Decrease by $240,000.
• Decrease by $40,000.

2)ABC Industries normally produces and sells 5,000 keyboards for personal computers each month. Variable manufacturing costs amount to $25 per unit, and fixed costs are $146,000 per month. The regular sales price of the keyboards is $86 per unit. ABC has been approached by a foreign company that wants to purchase an additional 1,000 keyboards per month at a reduced price. Filling this special order would not affect ABC 's regular sales volume or fixed manufacturing costs.

On the basis of the above information only, which of the following is not true?

Multiple Choice

• The fixed manufacturing costs of $146,000 are not relevant to this decision regarding the special order.
• At the 6,000-unit level of production, ABC's average cost per unit is $49.33.
• At the 5,000-unit level of production, ABC's average cost per unit is $54.20.
• It would not be profitable for ABC to consider the special order at a price less than $49 per unit.

3)ABC Products, a manufacturer of aircraft landing gear, makes 1,000 units each year of a special valve used in assembling one of its products. The unit cost of producing this valve includes variable costs of $70 and fixed costs of $60. The valves could be purchased from an outside supplier at $77 each. If the valve were purchased from the outside supplier, 40% of the total fixed costs incurred in producing this valve could be eliminated. Buying the valves from the outside supplier instead of making them would cause the company's operating income to:

Multiple Choice

• Increase by $26,000.
• Decrease by $29,000.
• Increase by $17,000.
• Decrease by $9,000.