It costs Dryer Company $26 per unit ($18 variable and $8 fixed) to produce its product, which normally sells for $38 per unit. A foreign wholesaler offers to purchase 3,000 units at $21 each. Dryer would incur special shipping costs of $2 per unit if the order were accepted. Dryer has sufficient unused capacity to produce the 3,000 units. If the special order is accepted, what will be the effect on net income?
A) $3,000 decrease
B) $3,000 increase
C) $9,000 increase
D) $54,000 increase

Question

Quizplus · Accepted Answer

To calculate the effect on net income, we need to compare the profit from accepting the special order to the profit from not accepting it.

Profit from not accepting the order:
Revenue from normal sales = $38/unit x 3000 units = $114,000
Total cost = $26/unit x 3000 units = $78,000
Net income = $114,000 - $78,000 = $36,000

Profit from accepting the order:
Revenue from special order = $21/unit x 3000 units = $63,000
Total cost = ($18 + $8 + $2)/unit x 3000 units = $84,000
Net income = $63,000 - $84,000 = -$21,000

Accepting the special order would result in a net loss of $21,000, so it is not profitable and should not be accepted. Therefore, the effect on net income is a decrease of $3,000 (the difference between net income from normal sales and net income from accepting the special order).

It Costs Dryer Company $26 Per Unit ($18 Variable and $8