Help Save Exit S Bluebird Mfg has received a special onetim

Help Save & Exit S Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $700 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 a re $3.50 per unit, which 5 variable cost and $1.25 fixed cost.If Bluebird accepts this additional business, the effect on net income will be:

Solution

Calculation of effect on the net income if order is accepted Production units 75000 units 90000 units Increase / (decrease) in net income Revenue - Normal sales (75000 units*$7) $525,000 $525,000 - Special order (15000 units * $3) $0 $45,000 Total Revenue $525,000 $570,000 Less : Variable Costs - Variable Cost ($2.25 per unit) $168,750 $202,500 Contribution Margin $356,250 $367,500 $11,250 The answer is $11250 Increase. Note : The overall fixed cost remain same irrespective of level of activity, hence it is not take into account.