Asked by Bimala Sharma Acharya on Apr 24, 2024
Verified
It costs Maker Company $22 of variable and $15 of fixed costs to produce one Panini press which normally sells for $57. A foreign wholesaler offers to purchase 1000 Panini presses at $40 each. Maker would incur special shipping costs of $5 per press if the order were accepted. Maker has sufficient unused capacity to produce the 1000 Panini presses. If the special order is accepted what will be the effect on net income?
A) $13000 decrease
B) $13000 increase
C) $22000 decrease
D) $7000 increase
Variable Costs
Costs that vary directly with the level of production or business activity, such as raw materials and labor.
Fixed Costs
Expenses that remain constant in total regardless of changes in the level of business activity or output.
Net Income
The total amount of profits earned by a company after all expenses and taxes have been deducted from revenue.
- Acquire knowledge on the variables that influence cost trends and their pertinence in step-by-step analysis.
- Comprehend the principles guiding decisions for special orders, particularly regarding capacity considerations and extra costs.
Verified Answer
XN
Xuan Ni Teong6 days ago
Final Answer :
B
Explanation :
Variable cost per unit is $22, fixed cost per unit is $15 and normal selling price is $57.
Contribution margin = selling price - variable cost = $57 - $22 = $35 per unit.
Total contribution margin for 1000 units = $35 x 1000 = $35000.
If the order is accepted, Maker will incur additional cost of $5 per unit for special shipping, which will reduce the contribution margin to $30 per unit.
Total contribution margin for 1000 units after additional cost = $30 x 1000 = $30000.
Total cost for 1000 units = variable cost + fixed cost = ($22 + $15) x 1000 = $37000.
Net income = Total contribution margin - Total cost = $30000 - $37000 = -$7000 decrease.
Therefore, the special order should not be accepted as it would result in a decrease in net income.
Contribution margin = selling price - variable cost = $57 - $22 = $35 per unit.
Total contribution margin for 1000 units = $35 x 1000 = $35000.
If the order is accepted, Maker will incur additional cost of $5 per unit for special shipping, which will reduce the contribution margin to $30 per unit.
Total contribution margin for 1000 units after additional cost = $30 x 1000 = $30000.
Total cost for 1000 units = variable cost + fixed cost = ($22 + $15) x 1000 = $37000.
Net income = Total contribution margin - Total cost = $30000 - $37000 = -$7000 decrease.
Therefore, the special order should not be accepted as it would result in a decrease in net income.
Learning Objectives
- Acquire knowledge on the variables that influence cost trends and their pertinence in step-by-step analysis.
- Comprehend the principles guiding decisions for special orders, particularly regarding capacity considerations and extra costs.