It costs Garner Company $12 of variable and $5 of fixedcosts to produce one bath
ID: 2662109 • Letter: I
Question
It costs Garner Company $12 of variable and $5 of fixedcosts to produce one bathroom scale which normally sells for $35. Aforeign wholesaler offers to purchase 2,000 scales at $15 each.Garner would incur special shipping costs of $1 per scale if theorder were accepted. Garner has sufficient unused capacity toproduce the 2,000 scales. If the special order is accepted, whatwill be the effect on net income?
A.
$6,000 decrease
B.
$4,000 decrease
C.
$30,000 increase
D.
$4,000 increase
It costs Garner Company $12 of variable and $5 of fixedcosts to produce one bathroom scale which normally sells for $35. Aforeign wholesaler offers to purchase 2,000 scales at $15 each.Garner would incur special shipping costs of $1 per scale if theorder were accepted. Garner has sufficient unused capacity toproduce the 2,000 scales. If the special order is accepted, whatwill be the effect on net income?
A.
$6,000 decrease
B.
$4,000 decrease
C.
$30,000 increase
D.
$4,000 increase
Explanation / Answer
If the Garner Company manufactures the scales, the net incomeof Garner Company will be:
Total Sales (2,000 scales * $35)
$70,000
Less: Variable Cost (2,000 scales * $12)
($24,000)
FixedCost (2,000 scales * $5)
($10,000)
TotalCost
($34,000)
Net Income
$36,000
If the Garner Company purchases the scales from foreignwholesaler, the net income of Garner Company will be:
Total Sales (2,000 scales * $35)
$70,000
Less: Cost of goods sold (2,000 scales * $15)
($30,000)
Shipping Costs(2,000 scales * $1)
($2,000)
Total Cost
($32,000)
Net Income
$38,000
Note: Comparing the two options, if theGarner Company purchases the scales directly from foreignwholesaler the net income of Garner company increases($38,000 - $36,000) $2,000. Here the shipping costs ofpurchases we considered as a Costs (Cost of goods sold).
If we couldn’t consider shipping costs are the part ofCost of goods sold, then the net income of Garner Company would beincreases ($40,000 - $36,000) $4,000
Total Sales (2,000 scales * $35)
$70,000
Less: Variable Cost (2,000 scales * $12)
($24,000)
FixedCost (2,000 scales * $5)
($10,000)
TotalCost
($34,000)
Net Income
$36,000
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