Question

Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3.80 per unit. Bluebird currently produces and sells 75,000 units at $7.80 each.

Answer 1

• See hypothetical figures below

Step-by-step explanation:

The question is incomplete. Similar questions provide information about capacity, production costs, variable costs, and fixed costs, and asks to calculate the effect on the net income

Assume this information completes the question: This level represents 80% of its capacity. Production costs for these units are $4.10 per unit, which includes $2.45 variable cost and $1.65 fixed cost. If Bluebird accepts this additional business, the effect on net income will be:

Solution

The net income is the revenue less the total costs.

Thus, the change in the net income is equal to the sum of the change in the revenue less the change in the total costs.

The change in the revenue is the number of bird feeders of the special order muliplied by the price:

• 15,000 units × $3.80/unit = $57,000 (increase)

Since the level of production is within the current capacity of production, the fixed costs do not change, and you must only take into account the variable costs: the increase in the cost is due only to the variable costs:

• 15,000 units × $2.45/unit = $36,750 (increase)

• Change in the net income = %57,000 - $36,750 = $20,250 (increase)

Then, the effect on the net income is an increase of $20,250.