QUESTION 3 t costs Kelly Industries $12 of variable and $5 of fixed costs to pro

Question

QUESTION 3 t 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 sufficient unused capacity to produce the 3,000 racks If the special order is accepted, what will be the effect on net income? O $9,000decrease $6,000 decrease $6,000 increase O $45,000 increase

Explanation / Answer

Selling Price 35.00 Variable Cost 12.00 Fixed Cost 5.00 External Offer 3,000 External Offer Price 15.00 Additional Cost 1.00 Relevant Cost for Special Order: Variable Cost 12.00 Fixed Cost 0.00 (Sunk Cost) Additional Cost 1.00 Opportunity Cost 0.00 (Idle Capacity available) Total Cost 13.00 External Offer Price 15.00 Benefit Due to Acceptance of Offer 2.00 External Offer 3,000 Total Benefit 6,000 Income will increase by 6000.(C)

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