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30 January, 12:54

It costs Fortune 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 1,000 scales at $15 each. Fortune would incur special shipping costs of $1 per scale if the order were accepted. Fortune has sufficient unused capacity to produce the 1,000 scales.

If the special order is accepted, what will be the effect on net income?

a) $2,000 increaseb) $2,000 decreasec) $3,000 decreased) $15,000 increase

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Answers (2)
  1. 30 January, 14:36
    0
    a) $2,000 increase

    Explanation:

    As fixed cost is the irrelevant expense in the decision making for the special order. It is avoidable cost.

    Special Order

    Quantity 1000 scales

    Price $15 per sale

    Less: Variable cost $12 per sale

    Less: Shipping cost $1 per sale

    Contribution margin $2 per scale

    Total Contribution margin = 1,000 scales x $2 per scale = $2,000

    Net Income will increase by $2,000 if the special order is accepted.
  2. 30 January, 15:37
    0
    c) $3,000 decrease

    Explanation:

    The sales less the variable cost gives the contribution margin. The contribution margin less the fixed cost gives the net operating income.

    Considering the data given with respect to the special order, the net income would be equal to the sales less the additional cost which are variable and fixed.

    net profit / (loss) from order

    = 1000 ($15 - $5 - $12 - $1)

    = ($3000)
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