It costs Fortune Company $12 of variable costs and $5 of fixed costs to produce

Question

It costs Fortune Company $12 of variable costs 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? (Points : 4)
a)$2,000 increase
b)$2,000 decrease
c)$3,000 decrease
d)$15,000 increase

Explanation / Answer

Answer: C. Decrease in net income $3,000 Incremental analysis:Increased revenue (1,000 scales x $15) = $15,000                 Increased costs: Variable cost ($12 x 1,000)                   = 12,000 fixed cost ($5 x 1,000)                          = 5,000 Shipping ($1 x 1,000)                            = 1,000 Increased cost total                                = $18,000 So decrease in net income                  = ($3,000)

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