Question

It costs Garrison Company $9.50 of variable and $5.20 of fixed costs to produce one bathroom scale which normally sells for $19.70. A foreign wholesaler offers to purchase 2,600 scales at $12.20 each. Garrison will incur special shipping costs of $1.70 per scale if the order is accepted. Garrison has sufficient unused capacity to accommodate the order. If the special order is accepted, what will be the effect on net income?

Answer 1

Effect on income= $2,600 increase

Step-by-step explanation:

Giving the following information:

It costs Garrison Company $9.50 of variable costs.

A foreign wholesaler offers to purchase 2,600 scales at $12.20 each. Garrison will incur special shipping costs of $1.70 per scale if the order is accepted.

Because it a special offer and there is unused capacity, we will not take into account the fixed costs:

Effect on income= units sold*contribution margin per unit

Effect on income= 2,600*(12.2 - 9.5 - 1.7)

Effect on income= $2,600 increase