Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesaler's name and would not affect Bluebird's sales through its normal channels. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost and $1.25 fixed cost.
-If Bluebird accepts this additional business, the effect on net income will be:
A) $45,000 increase.
B) $7,500 decrease.
C) $11,250 increase.
D) $33,750 increase.
E) $33,750 decrease.

Question

Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesaler's name and would not affect Bluebird's sales through its normal channels. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost and $1.25 fixed cost. 
-If Bluebird accepts this additional business, the effect on net income will be:
A) $45,000 increase.
B) $7,500 decrease.
C) $11,250 increase.
D) $33,750 increase.
E) $33,750 decrease.

Quizplus · Accepted Answer

The total revenue from the special order would be: 15,000 x $3 = $45,000.

The total variable cost of producing 15,000 units would be: 15,000 x $2.25 = $33,750.

The total fixed cost of producing 15,000 units would be: 15,000 x $1.25 = $18,750.

Therefore, the total cost of producing 15,000 units would be: $33,750 + $18,750 = $52,500.

The contribution margin per unit would be: $3 - $2.25 = $0.75.

So, the contribution margin for 15,000 units would be: 15,000 x $0.75 = $11,250.

Since the special order would not affect Bluebird's sales through its normal channels, we can say that the $11,250 contribution margin is an increase in net income.

Therefore, the effect on net income of accepting the special one-time order would be a $11,250 increase.