Question

It costs Marigold Corp. $12 of variable and $5 of fixed costs to produce one bathroom scale which normally sells for $35. A foreign wholesaler offers to purchase 3800 scales at $15 each. Garner would incur special shipping costs of $1 per scale if the order were accepted. Marigold has sufficient unused capacity to produce the 3800 scales. If the special order is accepted, what will be the effect on net income

Answer 1

The net income (loss) would be $3 per each bathroom scale should the wholesaler price offer be accepted. The effect is going to be a massive loss and possibly bankruptcy to the manufacturer on his net income.

Step-by-step explanation:

From the information given above,

To produce 1 bathroom scale,

Fixed cost = $5

Variable cost = $12

Total cost = fixed cost + variable cost = $ 17

Selling price = $35

Profit = Selling price - Total cost = $35 - $17 = $18

For the wholesaler, for each bathroom scale

Price offered = $15

Total cost = $ 17

Shipping cost = $1

Loss incurred = Price offered - (Total cost + Shipping cost)

= $15 - ($17 + $1) = $3

Total loss = Loss X Qty ordered

= $3 X $3800 = $11 400

This shows that, it would amount to great loss to the manufacturer going by the net income to be realized when the wholesaler price offer to be accepted.