Sunderson Products Inc has received a special order for 1000

Sunderson Products, Inc. has received a special order for 1,000 units of a sport-fighting kite. The customer has offered a price of $9.95 for each kite. The unit costs of the kite, at its normal sales level of 30,000 units per year, are detailed below The computations are Variable production costs Flxed production costs Varlable selling costs Fixed selling and admin. costs 2.35 0.75 3.45 There is ample idle capacity to produce the special order without any increase in total fixed costs. The variable selling costs on the special order would be $0.15 per unit instead of $0.75 per unit. The special order would have no impact on the company\'s other sales. What effect would accepting this special order have on the company\'s net operating income? O $1850 ncrease $4,550 increase O $1.850 decrease $4,550 decrease

Solution

The correct answer is $ 4,550 increase.

Please note that fixed cost will not have any impact on the additional sales since it has already been considered while computing the earlier profit and is a sunk cost for the new order.

So,

Sale price p.u. = $ 9.95

Variable cost p.u.= $ 5.4 (5.25+.15)

Net profit p.u. = $ 4.55

Total profit = 4,550 (4.5* 1,000)