Question

It costs Garner Company $12 of variable and $5 of fixed costs to produce one bathroom scale which normally sells for $35. A foreign wholesaler offers to purchase 3000 scales at $15 each. Garner would incur special shipping costs of $1 per scale if the order were accepted. Garner has sufficient unused capacity to produce the 3000 scales. If the special order is accepted, what will be the effect on net income?
A. $6,000 decreaseB. $45,000 increaseC. $6,000 increaseD. $9,000 decrease

Answer 1

Answer:

The correct answer is C.

Explanation:

Giving the following information:

It costs Garner Company $12 of variable costs.

A foreign wholesaler offers to purchase 3000 scales at $15 each. Garner would incur special shipping costs of $1 per scale if the order were accepted.

Because it is a special offer and there is unused capacity, we will not take into account the fixed costs:

Total variable cost= 12 + 1= $13 per unit

Effect on income= number of units* contribution margin per unit

Effect on income= 3,000* (15 - 13)= $6,000 increase