QUESTION 3 It costs Kelly Industries 12 of variable and 5 of

QUESTION 3 It costs Kelly Industries $12 of variable and $5 of fixed costs to produce one custom towel rack, which normally sells for $35. A wholesaler outside the United States offers to purchase 3,000 racks at $15 each Kelly would incur special shipping costs of $1 per rack if the order were accepted. Kelly has suficient unused capacity to produce the 3,000 racks If the special order is accepted, what will be the effect on net income? $6.000 decrease 56.000 increase $45,000 increase

Solution

Solution:

Sale revenue from special order = 3000 *$15 = $45,000

Variable costs = 3000* $12 = $36,000

Special Shipping cost = 3000* $1 = $3,000

Income from special order = Sale revenue from special order - variable costs - Special shipping cost

= $45000 - $36000 - $3000 = $6,000

Effect on net income if special order is accepted = Increase by $6,000

Hnece third option is correct.