In Karnes Company it costs $30 per unit ($20 variable and $10 fixed) to make a p

Question

In Karnes Company it costs $30 per unit ($20 variable and $10 fixed) to make a product that normally sells for $45. A foreign wholesaler offers to buy 4,000 units at $23 each. Karnes will incur special shipping costs of $1 per unit. Assuming that Karnes has excess operating capacity, indicate the net income (loss) Karnes would realize by accepting the special order. (If a box should be blank enter a 0, all boxes must be filled to be correct. If the impact on net income is a decrease use either a negative sign preceding the number, e.g. -45 or parenthesis, e.g. (45). Enter all other amounts as positive amounts and subtract where necessary.)

Reject Order
Accept Order
Net Income
Increase(Decrease)

Revenues $ $ $
Costs-Variable manufacturing
Shipping



Net Income $
$
$



The special order should be rejected or accepted.

Explanation / Answer

Here we have Var cost pu = $20 Fixed costs will be incurred irrespective of Spl order & hence should be ignored for decision making. Forign wholesaler offer is $23 pu Less Var cost pu = $20 Less Shipping cost =$1pu --------------------------- Net cont pu from Spl order = $2 pu Total Nos reqd = 4000 So Total Cont from Spl order = 4000*$2 = $8000 Ths Net Income will Increase by $8000 from SPl order..... So Sp order should be accepted .............................Ans (1)

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