Question

It costs Sunland Company $12 of variable and $5 of fixed costs to produce one bathroom scale which normally sells for $35. A foreign wholesaler offers to purchase 3200 scales at $15 each. Sunland would incur special shipping costs of $1 per scale if the order were accepted. Sunland has sufficient unused capacity to produce the 3200 scales. If the special order is accepted, what will be the effect on net income

Answer 1

The Net income will increase by $6,400

Step-by-step explanation:

Use the following formula to calculate the effect on the net income

As the fixed cost is irrelevant to special order

Net income = Increase in revenue - Increase in Variable cost - Special shipping cost

Where

Increase in revenue = 3200 x $15 = $48,000

Increase in Variable cost = 3200 x $12 = $38,400

Special shipping cost = 3200 x $1 = $3,200

Placing values in the formula

Net income = $48,000 - $38,400 - $3,200

Net income = $6,400

Hence, the net income will increase by $6,400