Question 2

Costa Company produces and sells a single product with a variable cost of $8 per unit. Annual capacity is 10,000 units, and annual fixed costs total $48,000. The selling price is $20 per unit and production and sales are budgeted at 5,000 units. Budgeted income before income taxes is $12,000. The Income Statement is: only half of the regular selling price per unit, but also less than the $17.60 average cost per unit ( $88,000/5,000 units). However, the $10 price offered exceeds the variable cost per unit by $2. If the company accepts the order, net income increases to $18,000. Costa receives an order from a distributor for 3,000 units at $10 per unit. This $10 price is not only half of the regular selling price per unit, but also less than the $17.60 average cost per unit ( $88,000/5,000 units). However, the $10 price offered exceeds the variable cost per unit by $2. If the company accepts the order, net income increases to $18,000. Revenue would increase to $130,000 with the special order. Each of the variable costs increases in total by 60% because total volume increases by 60%(3,000 units in the special order /5,000 units regularly produced). The revised income statement would appear as follows: Note that the fixed costs do not increase with the special order. Complete a differential analysis for Costa to make this decision and outline your recommendation