Falcon Co. produces a single product. Its normal selling price is $29 per unit. The variable costs are $17 per unit. Fixed costs are $19,500 for a normal production run of 5,000 units per month. Falcon received a request for a special order that would not interfere with normal sales. The order was for 1,430 units with a special price of $19 per unit. Falcon has the capacity to handle the special order, and for this order, a variable selling cost of $2 per unit would be eliminated. If the order is accepted, what would be the impact on net income? a. increase of $5,720 b. increase of $4,576 c. increase of $7,436 d. decrease of $3,432

Question

Business

Tristin Burke

30 May, 08:57

Falcon Co. produces a single product. Its normal selling price is $29 per unit. The variable costs are $17 per unit. Fixed costs are $19,500 for a normal production run of 5,000 units per month. Falcon received a request for a special order that would not interfere with normal sales. The order was for 1,430 units with a special price of $19 per unit. Falcon has the capacity to handle the special order, and for this order, a variable selling cost of $2 per unit would be eliminated. If the order is accepted, what would be the impact on net income? a. increase of $5,720 b. increase of $4,576 c. increase of $7,436 d. decrease of $3,432

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Answers (1)

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Callie Wolfe · Answer 1

a) increase of $5,720

Explanation:

The relevant cash flows for this decision are:

the variable cost of production - 17 - 2 = 15 per unit * 1,430 = $21,450 The sales revenue from the order - $19 * 1,430 = $27,170

The contribution from the special order would be determined as follows:

Contribution from special order = sales revenue - variable cost

= (19 - 15) * 1,430 = $5,720

Increase of = $5,720