It costs Fortune Company $12 of variable and $5 of fixed costs to produce one bathroom scale which normally sells for $35.A foreign wholesaler offers to purchase 1,000 scales at $16 each.Fortune would incur special shipping costs of $2 per scale if the order were accepted.Fortune has sufficient unused capacity to produce the 1,000 scales.If the special order is accepted, what will be the effect on net income?
A)$2,000 increase
B)$2,000 decrease
C)$3,000 decrease
D)$15,000 increase

Question

Quizplus · Accepted Answer

Without the special order:
Revenue = 0 (since no scales are sold)
Variable Costs = 0 (since no scales are produced)
Fixed Costs = $5 * 1,000 = $5,000
Net Income = Revenue - Variable Costs - Fixed Costs = -$5,000

With the special order:
Revenue = $16 * 1,000 = $16,000
Variable Costs = $12 * 1,000 = $12,000
Fixed Costs = $5 * 1,000 = $5,000 + $2 * 1,000 = $7,000 (including special shipping costs)
Net Income = Revenue - Variable Costs - Fixed Costs = $16,000 - $12,000 - $7,000 = -$3,000

Comparing the two scenarios, we can see that accepting the special order would result in a higher net income of $3,000 - (-$5,000) = $8,000. However, since the question is asking for the effect on net income, we just need to compare the net incomes of the two scenarios, which shows an increase of $2,000 (choice A).

It Costs Fortune Company $12 of Variable and $5 of Fixed