Question

It costs Garrison Company $13.10 of variable and $8.80 of fixed costs to produce one bathroom scale which normally sells for $23.30. A foreign wholesaler offers to purchase 1,700 scales at $9.50 each. Garrison will incur special shipping costs of $2.60 per scale if the order is accepted. Garrison has sufficient unused capacity to accommodate the order. If the special order is accepted, what will be the effect on net income? Decrease of $10,540 Decrease of $11,730 Increase of $10,540 Increase of $11,730

Answer 1

Correct answer---Net income decrease by $10540           

Net income is decreasing because relevant cost(Variable cost) of producing 1700 units is more than revenue from special offer.

Fixed cost is not considered for this decision as fixed cost remains the same whatever the decision is.

Calculation of Additional Contribution on Special offer
Sales Revenue	(1700 x 9.5)	$   16,150.00
Less: Variable cost	(13.10 x 1700)	$   22,270.00
Less: Additional shipping cost	(1700 x 2.6)	$      4,420.00
		$ (10,540.00)