Question

ACME company manufactures 20,000 bass-o-matic blenders. The company incurs $12/unit of variable costs and $4/unit if fixed costs at this level if production and sells each for $35. A foreign wholesaler offers to purchase 3,000 blenders at $15 each. ACME would incur special shipping costs of $1 each if the order were accepted. ACME has the capacity to produce an additional 5,000 blenders. If the special order is accepted, what will be the effect on net income? A) $45,000 increase B) $6,000 increase C) $6,000 decrease D) $9,000 increase

Answer 1

	Existing CVP structure
	Units sold	20000
		Per unit	Amount in $
	Sales	35	700000
	Less : Variable cost	12	240000
	Contribution margin		460000
	Less : Fixed cost	4	80000
	Net Income		380000
So, all the fixed costs are absorbed in the existing sale of 2000 units
And, hence, any additional sale it will generate need not absorb the fixed costs
So calculations of additional 3000 blenders offered to be purchased by foreign buyer is as follow
	Sales   =3000*15	45000
	Less : Variable cost   =3000*12	36000
	Less : Shipping cost of $1 for each unit	3000
	Contribution and net Income from additional sale as existing fixed cost will be irrelevant for this decision	6000
So, the correct alternative is B with answer $6000 increase