Question

Falcon Co. produces a single product. Its normal selling price is $28 per unit. The variable costs are $18 per unit. Fixed costs are $21,200 for a normal production run of 5,000 units per month. Falcon received a request for a special order that would not interfere with normal sales. The order was for 1,680 units with a special price of $19 per unit. Falcon has the capacity to handle the special order, and for this order, a variable selling cost of $2 per unit would be eliminated.

If the order is accepted, what would be the impact on net income?

increase of $6,552

increase of $5,040

decrease of $3,024

increase of $4,032

Answer 1

increase of $5,040

Step-by-step explanation:

Since there is excess capacity, we will not factor in Fixed costs in this special order.

Incremental profits than would be = Selling price - Variable and incremental costs.

We also eliminate any cost savings.

Per unit Profit = 19 - (18 - 2) = $3

Total impact on profits = $3 * 1680 = $5,040

If the order is undertaken a net positive impact of $5,040 will be added to the profit stream of the company.

Hope that helps.