Question

It costs Swifty Corporation $12 of variable and $5 of fixed costs to produce one bathroom scale which normally sells for $35. A foreign wholesaler offers to purchase 2800 scales at $15 each. Garner would incur special shipping costs of $1 per scale if the order were accepted. Swifty has sufficient unused capacity to produce the 2800 scales. If the special order is accepted, what will be the effect on net income?

Answer 1

Net Income will increase by $5,600

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

2800 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 = 2,800 scales x $2 per scale = $5,600

Net Income will increase by $5,600 if the special order is accepted.

Answer 2

The effect of the order if accepted on net income is an increase of $5,600.

Step-by-step explanation:

Since unused capacity will be used if the order is accepted, fixed cost will not be considered in calculating the profit effect of the order if accepted as follows:

Profit per unit from the foreign order = $15 - $12 - $1 = $1

Total additional profit = $2 * 2,800 = $5,600

Therefore, the effect of the order if accepted on net income is an increase of $5,600.