In Harley Company it costs $30 per unit ($19 variable and $11 fixed) to make a p

Question

In Harley Company it costs $30 per unit ($19 variable and $11 fixed) to make a product that normally sells for $48. A foreign wholesaler offers to buy 3,420 units at $23 each. Harley will incur special shipping costs of $2 per unit. Assuming that Harley has excess operating capacity.

Indicate the net income (loss) Harley would realize by accepting the special order. (If an amount reduces the net income for Increase (Decrease) column then enter with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000). Enter all other amounts in all other columns as positive and subtract where necessary.)

Reject
Order

Accept
Order

Net Income
Increase
(Decrease)

Reject
Order

Accept
Order

Net Income
Increase
(Decrease)

Revenues $ $ $ Costs—Manufacturing            Shipping Net income/(loss) $ $ $

Explanation / Answer

As the company has excess capacity of produciton, the company should accept the special order if it covers the variable cost of the production and shipping charges:

now,

sale at special price (A) $23

variable cost (B) $19

Shipping cost (C) $2

contribution (A-B-C) $2

quantity of special order is 3420

so, the total contribution by special order towards profit is 3420*2 = $6840

so the net income from special order is $6840.

Note: we will not consider fixed cost for this decision as this is sunk cost and will remain same whether the special order is accepted or not.

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