Question

Baker Company, an Ohio company that sells a branded product regionally to retail customers in Midwest. It normally sells its product for $40 per unit; however, it has received a one-time offer from a private-brand company on the West Coast to buy 1,000 units at $25 per unit. Even though the company has excess capacity to produce the units, the president of the company immediately rejected the offer; however, the chief accountant stated that it might be a profitable opportunity for the company, even though $25 is below its unit cost of $28, calculated as follows:

Cost
Direct material $12.00
Direct labor      8.00
Depreciation and other fixed costs      6.00
Total unit cost $26.00

Calculate the net advantage (disadvantage) of accepting the special order:

a. $5,000
b. ($5,000)
c. $25,000
d. ($25,000)

Answer 1

Effect on income= $5,000 increase

Step-by-step explanation:

Giving the following information:

One-time offer:

1,000 units at $25 per unit.

Because it is a special offer and there is unused capacity, we will not take into account the fixed costs.

Unitary cost= 12 + 8= $20

Effect on income= 1,000*(25 - 20)

Effect on income= $5,000 increase