Question

Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3.10 per unit. Bluebird currently produces and sells 75,000 units at $7.10 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 $3.65 per unit, which includes $2.30 variable cost and $1.35 fixed cost. If Bluebird accepts this additional business, the effect on net income will be:

Answer 1

the effect on net income will be : Increase by $12,000

Step-by-step explanation:

Bluebird Mfg is currently producing at a capacity of 80%, therefore there is excess capacity.

The fixed costs are irrelevant for this decision since (1) There is excess capacity (2) bird feeders would be marketed under the wholesaler’s name and would not affect Bluebird’s sales through its normal channels

This is because the fixed costs will be incurred whether the special one time order is accepted or not.

Incremental Costs and Revenues - special one-time order

Sales ( 15,000 × $3.10) 46,500

Less Variable Costs ( 15,000 × $2.30) (34,500)

Net Income 12,000

Therefore there will be an increase in net income by $12,000