Question

Dary Co. Produces a single product. Its normal selling price is $28 per unit. The variable costs are $18 per unit. Fixed costs are $20,000 for a normal production run of 5,000 units per month. Dary received a request for a special order that would not interfere with normal sales. The order was for 1,500 units and a special price of $17.50 per unit. Dary Co. has the capacity to handle the special order and, for this order, a variable selling cost of $2 per unit would be eliminated.

1. If the order is accepted, what would be the impact on net income?

a. decrease of $750
b. decrease of S6,750
c. increase of $2,250
d. increase of $1,500

2. Should the special order be accepted?

a. Cannot determine from the data given
b. Yes
c. No
d. There would be no difference in accepting or rejecting the special order.

Answer 1

Answer:

1. c. increase of $2,250

2. b. Yes

Explanation:

1. Calculation to determine what would be the impact on net income if the order is accepted

First step is to calculate the variable cost

Variable cost special order= ($18-$2)

Variable cost special order=$16

Now let calculate what would be the impact on net income if the order is accepted

Impact on net income=($17.50-$16)*1,500 units

Impact on net income=$1.50*1,500 units

Impact on net income= increase of $2,250

2. YES the special order should be accepted.