Peterson Company produces and sells 20,000 units at $20 per unit. Peterson Company's product cost is calculated as follows: $\begin{array} { l }
\text {Variable-unit-based costs }& \text { \$ 8 \text { per unit }} \
\text {Fixed costs }& \text { \$ 2 \text { per unit }} \
\text {Set-up costs }& \text {\$ 3 \text { per unit } } \
& \text { \$ 13 \text { per unit }} \
\end{array}$
A total of 500 set- ups at a cost of $120 per set- up are required to produce the 20,000 units. Peterson Company has received a special order to sell 5,000 units at $12 per unit. Peterson Company has excess capacity available, but these 5,000 would require 60 set- ups. If Peterson Company accepts the special order, Peterson Company's net income will:

Question

Peterson Company produces and sells 20,000 units at $20 per unit. Peterson Company's product cost is calculated as follows: $\begin{array} { l  }
 \text {Variable-unit-based costs }& \text { \$ 8 \text { per unit }} \
\text {Fixed costs }& \text { \$ 2 \text { per unit }} \
\text {Set-up costs }& \text {\$ 3 \text { per unit } } \
& \text { \$ 13 \text { per unit }} \
\end{array}$
 A total of 500 set- ups at a cost of $120 per set- up are required to produce the 20,000 units. Peterson Company has received a special order to sell 5,000 units at $12 per unit. Peterson Company has excess capacity available, but these 5,000 would require 60 set- ups. If Peterson Company accepts the special order, Peterson Company's net income will:

Quizplus · Accepted Answer

The special order will increase net income by $12,800. The contribution margin per unit is $4 ($12 selling price - $8 variable cost). The total contribution margin for the 5,000 units is $20,000 ($4 x 5,000). The additional set-up costs for the special order are $7,200 (60 set-ups x $120 per set-up). Therefore, the net income will increase by $12,800 ($20,000 - $7,200).

Peterson Company Produces and Sells 20,000 Units at $20 Per