Question

Aurora Enterprises incurs costs of $38 per unit ($27 variable and $11 fixed) to make a product that normally sells for $56. A wholesaler offers to buy 3,500 units at $36 each. This special order will result in additional shipping costs of $1.15 per unit. Assuming Aurora has adequate manufacturing capacity, it should

A : accept the offer because it will produce net income of $27,475.
B : reject the offer because it will lead to a net loss of $11,025.
C : accept the offer because it will produce net income of $31,500.
D : reject the offer because it will lead to a net loss of $7,000.

Answer 1

The correct answer is option A.

Step-by-step explanation:

The variable cost is $27, and the fixed costs are $11.

The price charged for the product is $56.

A wholesaler offers to buy 3,500 units at $36 each.

This special order will result in additional shipping costs of $1.15 per unit.

The average variable cost incurred in this order is

= $27 + $1.15

= $28.15

Profits earned

= Total revenue - Total variable cost

=
`(3,500* 36) - (3,500*28.15)`

= $126,000 - $98,525

= $27,475