Question

Falcon Co. produces a single product. Its normal selling price is $30 per unit. The variable costs are $16 per unit. Fixed costs are $22,700 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 1,440 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?

a. increase of $5,360.
b. decrease of $3,216.
c. increase of $4,288.
d. increase of $6,968.

Answer 1

See below

Step-by-step explanation:

Since we were given that the variable costs are $16 and for special order, $2 per unit will be eliminated.

Revised variable cost = $16 - $2 = $14 per unit

Normal selling price = $30 per unit

We can then calculate the profit per unit by considering the special price per unit and revised variable cost per unit

Profit per unit = Special price per unit - revised variable cost per unit

= $19 - $14

= $5 per unit

Also for 1,440 units, the special order is placed, hence would increase the net income by:

= Special order units × Profits

= 1,440 × $5

= $7,200

If the order is accepted, the net income is increased by $7,200