Falcon Co. produces a single product. Its normal selling price is $30.00 per uni
ID: 2385227 • Letter: F
Question
Falcon Co. produces a single product. Its normal selling price is $30.00 per unit. The variable costs are $19.00 per unit. Fixed costs are $25,000 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 1,500 units and a special price of $20.00 per unit. Falcon Co. has the capacity to handle the special order and, for this order, a variable selling cost of $1.00 per unit would be eliminated.
If the order is accepted, what would be the impact on net income?
a. increase of $3,000
b. decrease of $4,500
c. decrease of $750
d. increase of $1,500
Explanation / Answer
YES the special order should be accepted.
Variable costs applicable are normal variable cost of 19/unit - 1/unit = $ 18/unit
Special sales price = $20/unit
So profit per unit = 20-18 = $ 2/unit
Note: we should ignore fixed costs here as they are anyway incurred and do not increase on taking up this special order.
So net increase in profit = 2/unit * 1500 units = $ 3000
Answer: YES we should take up the special order, as the incremental profit is $ 3000.
Hope this helped ! Let me know in case of any queries.
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