Question

Blowing Sand Company has just received a one-time offer to purchase 9,400 units of its Gusty model for a price of $30 each. The Gusty model normally sells for $38 and costs $34 to produce ($24 in variable costs and $10 of fixed overhead). Because the offer came during a slow production month, Blowing Sand has enough excess capacity to accept the order. 1. Should Blowing Sand accept the special order

Answer 1

Net income from special order = $56,400

Blowing Sand Company should accept the order because it will increase net income by $56,400

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 the variable costs and the sales revenue.

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

1. The sales revenue from the order- $30 × 9400 = $282,000

2. the variable cost of production $24 per unit × 9,400 = $225,600

The contribution from the special order would be determined as follows:

Contribution from special order = sales revenue - variable cost

= $282,000 - $225,600

= $56,400

Blowing Sand Company should accept the order