It costs Lannon Fields $14 of variable costs and $6 of allocated fixed costs to produce an industrial trash can that sells for $30.A buyer in Mexico offers to purchase 3,000 units at $18 each.Lannon has excess capacity and can handle the additional production.What effect will acceptance of the offer have on net income?
A)decrease $4,000
B)increase $4,000
C)increase $54,000
D)increase $12,000

Question

Quizplus · Accepted Answer

Accepting the offer will increase net income by $12,000. This is because the relevant cost for the decision is the variable cost of $14 per unit. Selling at $18 per unit when the variable cost is $14 results in a $4 profit per unit. For 3,000 units, this equals a $12,000 increase in net income ($4 profit per unit * 3,000 units). Fixed costs are not relevant in this decision since they are allocated and will remain the same whether the offer is accepted or not.

It Costs Lannon Fields $14 of Variable Costs and $6