Question:

Burns 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 $403 in variable costs and $25 in fixed costs. Burns sells its saws to retail stores for $80 each. Allen Distributors has offered to purchase 5,000 saws per month at a reduced price. Burns can manufacture these additional units with no change in its present level of fixed manufacturing costs.

Assume that Allen Distributors offers to purchase the additional 5,000 units from Allen at a unit sale price that will add $100,000 per month to its operating income. The unit price Burns is charging Allen is:

Answer:

$200,000 +$100,000 = $300,000 / 5,000 = $60.

My question:

Where did the $200,000 come from in the equation? I would like to understand the equation so that i am prepared for my exam.

Thanks!