Nebraska Company produces and sells 20,000 units at $20 per unit.Nebraska Company's product cost is calculated as follows: $$\begin{array} { l l }
\text { Variable-unit-based costs } & \$ 8 \text { per unit } \
\text { Fixed costs } & \$ 2 \text { per unit } \
\text { Set-up costs } & \$ 3 \text { per unit } \
& \$ 13 \text { per unit }
\end{array}$$ A total of 500 set-ups at a cost of $120 per set-up are required to produce the 20,000 units.Nebraska Company has received a special order to sell 5,000 units at $10 per unit.Nebraska Company has excess capacity available, but these 5,000 would require 60 set-ups.If Nebraska Company accepts the special order, Nebraska Company's net income will _____.
A)decrease by $5,000
B)increase by $20,000
C)increase by $5,000
D)increase by $2,800

Question

Nebraska Company produces and sells 20,000 units at $20 per unit.Nebraska Company's product cost is calculated as follows: $$\begin{array} { l l } 
\text { Variable-unit-based costs } & \$ 8 \text { per unit } \
\text { Fixed costs } & \$ 2 \text { per unit } \
\text { Set-up costs } & \$ 3 \text { per unit } \
& \$ 13 \text { per unit }
\end{array}$$ A total of 500 set-ups at a cost of $120 per set-up are required to produce the 20,000 units.Nebraska Company has received a special order to sell 5,000 units at $10 per unit.Nebraska Company has excess capacity available, but these 5,000 would require 60 set-ups.If Nebraska Company accepts the special order, Nebraska Company's net income will _____.
A)decrease by $5,000
B)increase by $20,000
C)increase by $5,000
D)increase by $2,800

Quizplus · Accepted Answer

The special order's contribution to net income can be calculated by considering the revenue from the special order, the variable costs, and the additional set-up costs. The fixed costs per unit and the set-up costs per unit in the original calculation are not relevant for the special order because fixed costs do not change with the number of units produced, and the set-up costs need to be recalculated based on the specific number of set-ups for the special order.Revenue from special order = 5,000 units * $10/unit = $50,000Variable costs for special order = 5,000 units * $8/unit = $40,000Additional set-up costs for special order = 60 set-ups * $120/set-up = $7,200Net income increase from special order = Revenue - Variable costs - Additional set-up costs= $50,000 - $40,000 - $7,200= $2,800Therefore, accepting the special order will increase Nebraska Company's net income by $2,800.

Nebraska Company Produces and Sells 20,000 Units at $20 Per