Question

It costs dryer company $26 per unit ($18 variable and eight dollars fixed) to produce its product, which normally sells for $38 per unit. A foreign wholesaler offers to purchase 5000 units at $21 each. Dryer would incur special Shipping costs of $2 per unit if the order were accepted. Dryer has sufficient unused capacity to produce the 5000 units. If the special order is accepted, what will be the effect on net income?

Answer 1

Accepting the special order would decrease the net income by $55,000.

Step-by-step explanation:

To determine the effect on net income if the special order is accepted, we need to compare the profit before and after accepting the order. Currently, the company's profit per unit is $38 - $26 = $12. If the special order is accepted, the profit per unit will be $21 - $18 - $2 = $1.

The company would produce 5000 units, so the total profit before accepting the order would be $12 x 5000 = $60,000. After accepting the order, the total profit would be $1 x 5000 = $5000.Therefore, accepting the special order would decrease the net income by $60,000 - $5000 = $55,000.