Question

It costs Waterway Company $18.00 of variable costs and $7.80 of fixed costs to produce its product that sells for $40. Carla Vista Company, a foreign buyer, offers to purchase 3100 units at $23.50 each. If the special offer is accepted and produced with unused capacity, net income will:

Answer 1

Increase by $17,050

Step-by-step explanation:

In our analysis, we will use the incremental revenue and cost only. That means we exclude fixed costs since they are irrelevant for this decision and are already incurred.

Analysis of effects of accepting the special order

Sales (3,100 units x $23.50) $72,850

Less Variable Costs (3,100 units x $18.00) ($55,800)

Financial Advantage / (Disadvantage) $17,050

therefore,

If the special offer is accepted and produced with unused capacity, net income will: Increase by $17,050.