Question

Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3.70 per unit. Bluebird currently produces and sells 75,000 units at $7.70 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesaler’s name and would not affect Bluebird’s sales through its normal channels. Production costs for these units are $4.55 per unit, which includes $2.60 variable cost and $1.95 fixed cost. If Bluebird accepts this additional business, what will be the effect on net income?

Answer 1

Accepting the special order at Bluebird Mfg. would increase net income by $16,500, as it generates additional revenue of $55,500 while incurring additional variable costs of $39,000.

Step-by-step explanation:

Profit Impact of a Special Order

To determine the effect on net income from accepting the special one-time order, we must consider only the incremental costs and revenues associated with the order. The incremental revenue is the order size (15,000 units) times the offered price ($3.70), totaling $55,500. The incremental cost involves only the variable cost because fixed costs are already covered by the current production. The incremental cost is 15,000 units times the variable cost per unit ($2.60), totaling $39,000.

The change in net income can be calculated as the incremental revenue minus the incremental cost. Thus, the change in net income is $55,500 - $39,000 = $16,500. Since this is a positive amount, accepting the special order would increase Bluebird Mfg.'s net income by $16,500. This analysis assumes the additional production does not increase fixed costs and that the order does not affect regular sales.