Question

Radar Company sells bikes for $480 each. The company currently sells 4,000 bikes per year and could make as many as 4,370 bikes per year. The bikes cost $260 each to make: $160 in variable costs per bike and $100 of fixed costs per bike. Radar received an offer from a potential customer who wants to buy 370 bikes for $460 each. Incremental fixed costs to make this order are $46,000. No other costs will change if this order is accepted.

Compute Radar's additional income (ignore taxes) if it accepts this order.

Answer 1

$65,000

Step-by-step explanation:

The total cost of the additional order will be $46,000 of fixed costs and an additional $160 of variable costs for each of the 370 bikes. The additional production cost is:

`C=\$46,000+370*\$160\\C=\$105,200`

If each bike is going to be sold for $460, then the additional income (excluding taxes) from accepting this order is:

`I=(price*units)-cost\\I=(\$460*370)-\$105,200\\I=\$65,000`

Radar's additional income is $65,000.