Falcon Co. produces a single product. Its normal selling price is $30.00 per unit. The variable costs are $19.00 per unit. Fixed costs are $25,000 for a normal production run of 5,000 units per month. Falcon received a request for a special order that would not interfere with normal sales. The order was for 1,500 units with a special price of $20.00 per unit. Falcon has the capacity to handle the special order, and for this order, a variable selling cost of $1.00 per unit would be eliminated.
If the order is accepted, what would be the impact on net income?
A) decrease of $750
B) decrease of $4,500
C) increase of $3,000
D) increase of $1,500

Question

Quizplus · Accepted Answer

The special order price is $20.00 per unit, and the variable cost is $19.00 per unit. The $1.00 variable selling cost is eliminated, making the effective variable cost $18.00 per unit. The contribution margin per unit is $20.00 - $18.00 = $2.00. For 1,500 units, the increase in net income is 1,500 units * $2.00 = $3,000.

Falcon Co Produces a Single Product