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30 May, 09:05

It costs Blakeley Company $22.10 of variable and $2.20 of allocated fixed costs to produce an industrial trash can that normally sells for $31.30. A buyer offers to purchase 2,200 units at $21.00 each. Blakeley has excess capacity and can handle the additional production. What effect will acceptance of the offer have on net income?

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  1. 30 May, 10:01
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    Effect on income = $2,420 decrease

    Explanation:

    Giving the following information:

    It costs Blakeley Company $22.10 of variable

    A buyer offers to purchase 2,200 units at $21.00 each

    Because there is an unused capacity and it is a special offer, we will not take into account the fixed costs.

    Effect on income = 2,200 * (21 - 22.1)

    Effect on income = $2,420 decrease

    In this case, the company should reject the offer, because the unitary contribution margin is negative.
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