It costs Crane Company $26 per unit ($18 variable and $8 fixed) to produce its product, which normally sells for $38 per unit. A foreign wholesaler offers to purchase 5800 units at $21 each. Crane would incur special shipping costs of $2 per unit if the order were accepted. Crane has sufficient unused capacity to produce the 5800 units. If the special order is accepted, what will be the effect on net income

Question

Business

Mila Beck

3 May, 05:53

It costs Crane Company $26 per unit ($18 variable and $8 fixed) to produce its product, which normally sells for $38 per unit. A foreign wholesaler offers to purchase 5800 units at $21 each. Crane would incur special shipping costs of $2 per unit if the order were accepted. Crane has sufficient unused capacity to produce the 5800 units. If the special order is accepted, what will be the effect on net income

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Newton · Answer 1

It will result in a reduction in net income by $40,600.

Explanation:

The availability or otherwise of excess capacity is a key consideration in determining the effect of the acceptance of the offer on the net income. Since there is excess capacity, the effect on the net income (which is the revenue less all cost) can be so determined independently.

Considering the offer,

Sales = $21 * 5800

= $121,800

Total cost to be incurred with the acceptance of the offer

= 5800 ($18 + $8 + $2)

= $162,400

Net income / (loss) = $121,800 - $162,400

= ($40,600)