Question

Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $2.80 per unit. Bluebird currently produces and sells 75,000 units at $6.80 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 $3.60 per unit, which includes $2.15 variable cost and $1.45 fixed cost. If Bluebird accepts this additional business, the effect on net income will be:

Multiple Choice

• $9,750 increase.

• $32,250 increase.

• $12,000 decrease.

• $32,250 decrease.

• $42,000 increase.

Answer 1

Existing Sales	75000
Capcity Usage	80%
Total Capacity	93750	(75000/80%)
Less: Existing Sales	75000
Idle Capacity	18750
Since Co has idle capacity, no opportunity cost will be there
Sales	42000	(15000*2.80)
Less: Variable Cost Incurred	54000	(15000*3.60)
Net Income will reduce by	-12000
$12000 Decrease