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Tarazz Company manufactures computers. The following cost information for the manufacture of one computer has been compiled.

\begin{tabular}{lr}
Direct materials & \[tex]$48 \\
Direct labor & \$[/tex]64 \\
Variable manufacturing overhead & \[tex]$48 \\
\hline
Fixed manufacturing overhead & \$[/tex]32 \\
\hline
Total cost per unit & \[tex]$192 \\
\hline
\end{tabular}

The \$[/tex]32 amount reflects the amount of indirect cost allocated to each unit. However, as indicated, the total of these indirect costs is fixed.

Tarazz has received a special order for 500 computers at a price of \[tex]$175 per unit. By how much will overall company net income change if the order is accepted?

A. Company net income will INCREASE by \$[/tex]8,500 if the order is accepted.
B. Company net income will DECREASE by \[tex]$8,500 if the order is accepted.
C. Company net income will DECREASE by \$[/tex]7,500 if the order is accepted.
D. Company net income will INCREASE by \$7,500 if the order is accepted.



Answer :

GinnyAnswer
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.

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