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 with a special price of $20.00 per unit. Falcon 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?

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Business

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7 November, 10:27

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 with a special price of $20.00 per unit. Falcon 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?

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Van Klein · Answer 1

If the order is accepted the net income is increased by $3,000

Explanation:

Since in the given question, the variable cost is $19.00 per unit and for special order $1.00 per unit is eliminated.

So,

Revised variable cost is $19.00 - $1.00 = $18.00 per unit.

And, the selling price is $30.00 per unit.

By considering the special price per unit and revised variable cost per unit we can calculate the profit per unit which is equals to

Special price per unit - revised variable cost per unit

$20.00 - $18.00

$2.00 per unit

As for 1,500 units, the special order is placed.

So, it would increase the net income by

Special order units * Profits

1,500 units * 2.00 per unit

$3,000

Hence, if the order is accepted the net income is increased by $3,000