Question

At Pharoah Electronics, it costs $33 per unit ($19 variable and $14 fixed) to make an MP3 player that normally sells for $55. A foreign wholesaler offers to buy 3,750 units at $28 each. Pharoah Electronics will incur special shipping costs of $1 per unit.

Required:
Assuming that Pharoah Electronics has excess operating capacity, indicate the net income (loss) Pharoah Electronics would realize by accepting the special order.

Answer 1

Reject Order Accept order Net Income

Increase (Decrease)

Revenues = $0 $105,000 $105,000

(3750 units x $28)

Costs-Manufacturing = $0 -$71,250 -$71,250

(3750 units x $19 (VC) )

Shipping $0 -$3,750 -$3,750

(3750 units x $1)

Net Income $0 $30,000 $30,000

Pharoah Electronic would realize the net Income of $30,000 by accepting the special order. Hence, the special order should be accepted.