Question

It costs Sunland Company $28 of variable costs and $18 of allocated fixed costs to produce an industrial trash can that sells for $90. A buyer in Mexico offers to purchase 3000 units at $30 each. Sunland Company has excess capacity and can handle the additional production. What effect will acceptance of the offer have on net income?

Answer 1

The effect that will happen on the net income is an increase in $6,000.

Step-by-step explanation:

For this product, we have:

Price: $90.

Variable cost: $28

Allocated fixed cost: $18

There is an opportunity to sell 3,000 units at $30, and the firm has excess capacity.

As the allocated fixed cost only counts for the existing level of production (before accepting the 3,000 additional units), they don't matter in the decision.

With excess capacity, the firm only incurs in the variable cost of $28 per unit. If the price is $30, the variation in the net income will be:

`\Delta NI=Q(P'-VC)=3,000*(30-28)=3,000*2=6,000`

The effect that will happen on the net income is an increase in $6,000.