Question

Special offer pricing LO P7 Radar Company sells bikes for $540 each. The company currently sells 4,050 bikes per year and could make as many as 4,440 bikes per year. The bikes cost $230 each to make: $170 in variable costs per bike and $60 of fixed costs per bike. Radar receives an offer from a potential customer who wants to buy 390 bikes for $510 each. Incremental fixed costs to make this order are $60 per bike. No other costs will change if this order is accepted.

(a) Compute the income for the special offer

Answer 1

The income from the special offer of selling 390 bikes at $510 each, after accounting for variable costs and incremental fixed costs, amounts to $109,200.

Step-by-step explanation:

To calculate the income from the special offer, we need to consider the sale price, the variable costs, and the incremental fixed costs associated with the order. Since we're not provided with information about total fixed costs for the company and initial profitability, we can't assess overall profit, but we can assess the income from this special batch of 390 bicycles. The income from the special offer can be calculated by multiplying the number of bikes sold by the sale price per bike, then subtracting the total costs associated with manufacturing these bikes (which include both variable costs and incremental fixed costs).

• Sales revenue from special offer = 390 bikes × $510/bike
• Variable costs for special offer = 390 bikes × $170/bike
• Incremental fixed costs for special offer = 390 bikes × $60/bike
• Income from special offer = Sales revenue - Variable costs - Incremental fixed costs

By plugging in the numbers, we find:

• Sales revenue from special offer = $198,900
• Variable costs for special offer = $66,300
• Incremental fixed costs for special offer = $23,400
• Income from special offer = $198,900 - $66,300 - $23,400 = $109,200