Question

It costs Dryer Company $26 per unit ($18 variable and $8 fixed) to produce its product, which normally sells for $38 per unit. A foreign wholesaler offers to purchase 5,000 units at $21 each. Dryer would incur special shipping costs of $2 per unit if the order were accepted. Dryer has sufficient unused capacity to produce the 5,000 units.

Required:
1. If the special order is accepted, what will be the effect on net income?

Answer 1

Effect on income= $5,000 increase

Step-by-step explanation:

Giving the following information:

Unitary variable cost= $18

Special offers to purchase 5,000 units at $21 each.

Dryer would incur special shipping costs of $2 per unit if the order were accepted.

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

To determine the effect on income, we need to calculate the total contribution margin.

Total contribution margin= units sold*(selling price - unitary variable cost)

Total contribution margin= 5,000*(21 - 20)= $5,000

Effect on income= $5,000 increase