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Backcountry Equipment makes backpacking stoves. It has the capacity to produce 10,000 stoves per year and...

Backcountry Equipment makes backpacking stoves. It has the capacity to produce 10,000 stoves per year and currently is producing and selling 7,000 stoves. The normal selling price for a stove is $125. Variable costs are $55 per stove. Facilitylevel costs of $ 15 are allocated to each stove. Backcountry Equipment has received a special order to purchase 1,500 stoves for $65 each . If Backcountry Equipment accepts the special order, what is the effect on net income (increase or decrease and by how much)?

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Answer #1

Answer---------------Increase in income by $15,000

Working

financial advantage (disadvantage) of accepting the special order
Additional Revenue from offer (1500 x $65) $ 97,500
Less: Total Additional cost due to acceptance of offer $ 82,500
Financial Advantage $ 15,000

.

Calculation of Additional Cost of Order
Per Unit Total
Variable cost $                    55.00 $ 82,500

The allocated facility cost is not an additional cost hence it is not included in above cost chart

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