Question

It costs Fortune Company $12 of variable and $5 of fixed costs to produce one bathroom scale which normally sells for $35. A foreign wholesaler offers to purchase 1,000 scales at $15 each. Fortune would incur special shipping costs of $1 per scale if the order were accepted. Fortune has sufficient unused capacity to produce the 1,000 scales.

If the special order is accepted, what will be the effect on net income?

a)$2,000 increaseb)$2,000 decreasec)$3,000 decreased)$15,000 increase

Answer 1

a)$2,000 increase

Step-by-step explanation:

As fixed cost is the irrelevant expense in the decision making for the special order. It is avoidable cost.

Special Order

Quantity 1000 scales

Price $15 per sale

Less: Variable cost $12 per sale

Less: Shipping cost $1 per sale

Contribution margin $2 per scale

Total Contribution margin = 1,000 scales x $2 per scale = $2,000

Net Income will increase by $2,000 if the special order is accepted.

Answer 2

c)$3,000 decrease

Step-by-step explanation:

The sales less the variable cost gives the contribution margin. The contribution margin less the fixed cost gives the net operating income.

Considering the data given with respect to the special order, the net income would be equal to the sales less the additional cost which are variable and fixed.

net profit/(loss) from order

= 1000 ($15 - $5 - $12 - $1)

= ($3000)