It costs Orkid Company $17 of variable costs and $3 of fixed costs to produce its product. The company currently has unused capacity. The product sells for $25. Homer Industries offers to purchase 5,000 units at $19 each. In the deal, Orkid will incur special shipping costs of $1.50 per unit. If the special offer is accepted and produced with unused capacity, net income will:

A. increase $2,500.

B. decrease $5,000.

C. increase $10,000.

D. decrease $30,000.

Question

Business

Chanel Walton

26 December, 07:37

It costs Orkid Company $17 of variable costs and $3 of fixed costs to produce its product. The company currently has unused capacity. The product sells for $25. Homer Industries offers to purchase 5,000 units at $19 each. In the deal, Orkid will incur special shipping costs of $1.50 per unit. If the special offer is accepted and produced with unused capacity, net income will:

A. increase $2,500.

B. decrease $5,000.

C. increase $10,000.

D. decrease $30,000.

+3

Answers (1)

Know the Answer?

Colin Molina · Answer 1

Answer: Option (A) is correct.

Explanation:

Given that,

Variable costs = $17

Fixed costs to produce = $3

Product sells = $25

Homer Industries offers = 5,000 units

Unit selling price = $19

Shipping costs = $1.50 per unit

Net profit = Unit selling price - Variable costs - Shipping costs

= $19 - $17 - $1.50

= $0.50

Total increase in profit = 5000 units * Net profit

= 5,000 * 0.50

= $2,500