Question

Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $4.00 per unit Bluebird currently produces and sells 75,000 units at $8.00 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesaler's name and would not affect Bluebird's sales through its normal channels. Production costs for these units are $5.00 per unit, which includes $2.75 variable cost and $2.25 fixed cost. If Bluebird accepts this additional business, the effect on net income will be Multiple Choice $60,000 increase. $18,750 increase $41,250 increase $15,000 decrease $41,250 decrease.

Answer 1

Answer is Option (2)          $18,750 Increase

Calculation of effect on net income if Bluebird accepts the additional business:

Bluebird currently produces and sells 75,000 units and s level represents 80% of its capacity

Hence full capacity shall be = 75000 / 80% = 93750 units

Hence Blue bird can produce additional 15000 units without incurring additional fixed costs

Purticules	Amount
Incremental Revenue (15000 Units *$4.00)	$ 60,000
Less: Incremental Costs :
Variable costs (15000 Units *$2.75 )	$41,250
Increase in Net income	$ 18,750

Hence Net income shall increase by $18,750, if Bluebird accepts the additional business