Question

Green Lawn Company is considering a special order for 1,000 new sprinkler systems from a new customer, a foreign distributor. The foreign distributor is offering to purchase the sprinkler systems for $1,200 each from Green Lawn Company. Green Lawn Company currently sells them for $2,000. Green Lawn Company has excess capacity. It costs Green Lawn Company $1,000 in variable costs and $500 in fixed costs for each unit. They will not incur any additional fixed costs due to this order. If Green Lawn Company accepts this order, Net Income will be affected by how much

Answer 1

Answer:

$200,000

Explanation:

The computation of Net Income is shown below:-

The green lawn firm is over-capable of approving the order. The extra fixed costs do not have to be incurred. This way, fixed costs are avoided and only variable costs need to be incurred.

For computing the net income first we need to find out the profit per unit which is here below:-

Profit per unit = Sell price per unit - Variable Cost per unit

= $1,200 - $1,000

= $200

Total Profit = Profit per unit × 1,000 unit order

= $200 × 1,000 unit order

= $200,000

So, net income increased by $200,000

Therefore for computing the total profit we simply applied the above formula.