Question

Maize Company incurs a cost of $35 per unit, of which $20 is variable, to make a product that normally sells for $58. A foreign wholesaler offers to buy 5,400 units at $30 each. Maize will incur additional costs of $3 per unit to imprint a logo and to pay for shipping. Compute the increase or decrease in net income Maize will realize by accepting the special order, assuming Maize has sufficient excess operating capacity.

Answer 1

Answer:

$37,800.00

Explanation:

Maize Company cost structure is such that $20 out of the $35 is a variable cost and the balance of $15 is a fixed cost.

So the fixed cost will always be incurred whether or the special order is accepted.

So he relevant cost of accept the special order from the foreign wholesaler

is the relevant variable cost which is the variable cost of production and the additional print logo cost

Also remember that whether or not the order is accepted the fixed cost will still be incurred and besides Maize still has excess capacity

A relevant variable cost is the future cash cost that would be incurred as a result of producing and selling a unit of the product.

Relevant cost =  $20 + $3

                   = $23

The increase in net income = (selling price - relevant cost)× unit sold

=( $30 - $23 ) × 5,400

$37,800.00