Question

It costs Oriole 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 2100 scales at $15 each. Garner would incur special shipping costs of $1 per scale if the order were accepted. Oriole has sufficient unused capacity to produce the 2100 scales. If the special order is accepted, what will be the effect on net income?

Answer 1

Answer:

Increase of $4000

Explanation:

Oriole has sufficient idle space to process the order form the foreigner. Her fixed cost will not change.

Her gains from the order will be (new contribution margin per unit x order quantity )- extra shipping expense

New contribution margin = order  price- variable costs

=$15- $13

=$3

Total contribution margin

= $3 x 2000

=$6000

Extras shipping expense = $1 x 2000 = $2000

net gains = $6000-$2000

=Increase of $4000