Question

Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $2.90 per unit. Bluebird currently produces and sells 75,000 units at $6.90 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 $3.75 per unit, which includes $2.20 variable cost and $1.55 fixed cost. If Bluebird accepts this additional business, the effect on net income will be:

Multiple Choice

• $10,500 increase.

• $33,000 increase.

• $43,500 increase.

• $12,750 decrease.

• $33,000 decrease.

Answer 1

The correct answer is $ 10,500 increase.

Reasoning:

We do not consider fixed cost when calculating the net income for this special order because those fixed costs are not being specifically incurred for the special order, so what matters is the Variable cost that is being incurred for the special order units.

Net Income = (Sales Price - Variable cost)*Units

Net Income = (2.9 - 2.2)*15000

Net Income Increase = $ 10,500

It is an increase because sales price is greater then variable cost.