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 and a special price of $20.00 per unit. Falcon Co. 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

To determine the impact on net income, we need to compare the contribution margin of the special order to the regular contribution margin.

Contribution Margin = Selling Price - Variable Costs

Regular Contribution Margin = $30 - $19 = $11 per unit

Special Order Contribution Margin = $20 - $19 = $1 per unit

Total Contribution Margin for Special Order = $1 x 1,500 = $1,500

Since there are no additional variable selling costs associated with the special order, the entire $1,500 would be added to net income.

Therefore, the net income impact would be an increase of $1,500.

Note that answer choice A is incorrect because decreasing net income would mean a negative impact, and the special order generates additional revenue and contribution margin. Answer choice B is incorrect because the special order does not result in a decrease of $4,500. Answer choice D is incorrect because the special order generates an additional contribution margin of $1,500, not $3,000.

Falcon Co Produces a Single Product