It costs Garner 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 3,000 scales at $15 each. Garner would incur special shipping costs of $1 per scale if the order were accepted. Garner has sufficient unused capacity to produce the 3,000 scales. If the special order is accepted, what will be the effect on net income?
A) $6,000 increase
B) $6,000 decrease
C) $9,000 decrease
D) $45,000 increase

Question

Quizplus · Accepted Answer

The variable cost per scale is $12, and the special shipping cost adds $1, making the total variable cost $13 per scale. The offer is $15 per scale, so the profit per scale is $15 - $13 = $2. Selling 3,000 scales at a profit of $2 each results in a $6,000 increase in net income. Fixed costs are not affected by this decision since they would be incurred regardless of accepting the special order.

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