It costs Sheffield Corp. $12 of variable and $5 of fixed costs to produce one bathroom scale which normally sells for $35. A foreign wholesaler offers to purchase 2000 scales at $15 each. Sheffield would incur special shipping costs of $1 per scale if the order were accepted. Sheffield has sufficient unused capacity to produce the 2000 scales. If the special order is accepted, what will be the effect on net income?

Question

Jelly

Business

19 October, 02:34

It costs Sheffield Corp. $12 of variable and $5 of fixed costs to produce one bathroom scale which normally sells for $35. A foreign wholesaler offers to purchase 2000 scales at $15 each. Sheffield would incur special shipping costs of $1 per scale if the order were accepted. Sheffield has sufficient unused capacity to produce the 2000 scales. If the special order is accepted, what will be the effect on net income?

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Answers (1)

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Aileen Burton · Answer 1

the effect on pre-tax net income will be an increase for 4,000.

Explanation:

This is a case for Relevant cost:

The company has sufficient capacity to produce this scales, without increasing the fixed cost.

we need to check if the offer covers the variable cost and the additional shipping cost.

15$ sales price - $12 variable cost - $1 shipping cost = $2 contribution margin

2000scales * 2 CM = 4,000 effect on net income