Preston Wade
Preston Wade, a local craftsman, normally sells his handcrafted wooden birdhouses for $88 each. Preston has the capacity to produce as many as 50 birdhouses a week. In a normal week, Preston makes 20 birdhouses with the following costs per unit:
$\begin{array}{lc}
\text { Direct materials } & \$ 5.00 \
\text { Direct labour } & \$ 20.00 \
\text { Variable overhead } & \$ 4.00 \
\text { Fixed overhead } & \$ 2.00
\end{array}$

-Refer to the Preston Wade information below.
Preston has received a special order from a local plant nursery to purchase 25 birdhouses for a price of $90 each.The nursery wishes to have the birdhouses engraved with their own logo,therefore,the order would require the rental of a special engraving tool at a cost of $200.If Preston accepts the special order,net income will increase by:

Question

Preston Wade
Preston Wade, a local craftsman, normally sells his handcrafted wooden birdhouses for $88 each. Preston has the capacity to produce as many as 50 birdhouses a week. In a normal week, Preston makes 20 birdhouses with the following costs per unit:
$\begin{array}{lc}
\text { Direct materials } & \$ 5.00 \
\text { Direct labour } & \$ 20.00 \
\text { Variable overhead } & \$ 4.00 \
\text { Fixed overhead } & \$ 2.00
\end{array}$

-Refer to the Preston Wade information below.
Preston has received a special order from a local plant nursery to purchase 25 birdhouses for a price of $90 each.The nursery wishes to have the birdhouses engraved with their own logo,therefore,the order would require the rental of a special engraving tool at a cost of $200.If Preston accepts the special order,net income will increase by:

Quizplus · Accepted Answer

If Preston accepts the special order, the total revenue will be 25 x $90 = $2250. However, he will also need to rent the engraving tool for $200, which will be an additional cost. Therefore, the total profit will be:

Total profit = Total revenue - Total cost

Total cost = $200 (engraving tool rental)
Total revenue = $2250
Total profit = $2250 - $200 = $2050

However, this is not the net income increase because we don't know what Preston's current income is. Let's say, for example, that Preston's current income is $750. Then, if he accepts the special order, his net income will increase by:

Net income increase = Total profit - Current income

Current income = $750
Total profit = $2050
Net income increase = $2050 - $750 = $1300

Therefore, the best choice is B, which represents the net income increase if Preston accepts the special order.

Preston Wade Preston Wade, a Local Craftsman, Normally Sells His

Preston Wade
Preston Wade, a Local Craftsman, Normally Sells His