It costs Galiente Company $46 per unit ($27 variable and $19 fixed) to produce its product which normally sells for $58 per unit. A Brazilian wholesaler offers to purchase 5000 units at $36 each. Galiente would incur special shipping costs of $5 per unit if the order were accepted. Galiente has sufficient unused capacity to produce the 5000 units. If the special order is accepted what will be the effect on net income?
A) $50000 decrease
B) $20000 increase
C) $15000 increase
D) $35000 increase

Question

Quizplus · Accepted Answer

The special order's unit price is $36, and the variable cost is $27. The special shipping cost adds $5 per unit, making the total variable cost $32 per unit. The difference between the selling price and the total variable cost ($36 - $32) is $4. For 5000 units, the increase in net income is 5000 units * $4/unit = $20,000. Fixed costs do not change with this order, as there is unused capacity.

It Costs Galiente Company $46 Per Unit ($27 Variable and $19