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Cyclorama makes and sells Power-Speed bicycles for $400 each. The cost of making bicycles includes variable...

  1. Cyclorama makes and sells Power-Speed bicycles for $400 each. The cost of making bicycles includes variable costs of $150 per bicycle and fixed costs of $300,000 per year. Cyclorama has been approached by the state police agency about making a one-time purchase of 200 bicycles and has offered to pay Cyclorama $280 apiece for them.

Assuming that the company has time to make the bicycles without incurring any additional costs, should Cyclorama accept the offer even though the selling price is below its normal price? What will be the impact on net income if the offer is accepted?

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Answer #1
PARTICULARS WITHOUT SPECIAL ORDER WITH SPECIAL ORDER
SALES 400 280
LESS : VARIABLE COST -150 -150
CONTRIBUTION 250 130
FIXED COST 300000
BREAK EVEN SALES = FIXED COST / CONTRIBUTION
BREAK EVEN SALES= 300000/250
BREAK EVEN SALES(UNITS)= 1200
YES THE ORDER SHOULD BE ACCEPTED AS THE CONTRIBUTION IS IN PLUS
AND FIXED COST WILL NOT CHANGE DUE TO THIS
NET INCOME IF OFFER ACCEPTED
CONTRIBUITON 130
UNITS 200
NET INCOME 26000
SO NET INCOME WILL INCREASE BY $ 26000 IF OFFER ACCEPTED
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