Question

Pederson Enterprises produces giant stuffed bears. Each bear consists of $12 of variable costs and $9 of fixed costs and sells for $45. A wholesaler offers to buy 8,000 units at $14 each, of which Pederson has the capacity to produce. Pederson will incur extra shipping costs of $1 per bear.

Determine the incremental income or loss that Pederson Enterprises would realize by accepting the special order.

Incremental lossIncremental profit___$

Answer 1

Incremental Income =$8,000

Step-by-step explanation:

In order to carry out an incremental analysis, only relevant cash flows should be considered.

The relevant cash flows from accepting the special order are

1. the variable costs
2. sales revenue at the offer price of $14
3. Extra shipping cost

Please, note that the fixed costs are not relevant for this decision. Simply because they would be incurred either way and that are not completely traceable to this product.

Incremental income

Incremental income = (offer selling price - variable cost) × units

= 14 - (12 + 1) × 8000 =$ 8000

Incremental Income =$ 8,000