It costs Lannon Fields $28 of variable costs and $12 of allocated fixed costs to produce an industrial trash can that sells for $60. A buyer in Mexico offers to purchase 3,000 units at $36 each. Lannon Fields has excess capacity and can handle the additional production. What effect will acceptance of the offer have on net income?
A) Decrease $12,000
B) Increase $12,000
C) Increase $108,000
D) Increase $24,000

Question

Quizplus · Accepted Answer

Accepting the offer will increase net income by $24,000. This is because the variable cost is $28 per unit, and the selling price is $36 per unit, leaving a contribution margin of $8 per unit. For 3,000 units, this results in an increase of $24,000 ($8 * 3,000) to net income. Fixed costs are not affected by this decision since they are allocated and the company has excess capacity.

It Costs Lannon Fields $28 of Variable Costs and $12