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
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 | ||||
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