Bluebird Mfg.has received a special one-time order for 15,000 bird feeders at $3 per unit.Bluebird currently produces and sells 75,000 units at $7.00 each.This level represents 80% of its capacity.These bird feeders would be marketed under the wholesaler's name and would not affect Bluebird's sales through its normal channels.Production costs for these units are $3.50 per unit,which includes $2.25 variable cost and $1.25 fixed cost.If Bluebird accepts this additional business,the incremental cost will be:

A) $45,000.
B) $11,250.
C) $38,750.
D) $7,500.
E) $33,750.

Question

edgar aleman · Accepted Answer

Final Answer : E, Explanation :  To calculate the incremental cost of accepting the additional business, we need to subtract the revenue and production costs of the special order from their current revenue and production costs.Revenue from special order = 15,000 units x $3 per unit = $45,000Revenue from regular sales = 75,000 x $7.00 per unit = $525,000Total revenue = $525,000 + $45,000 = $570,000Production cost per unit for special order = $3.50 per unitVariable cost per unit = $2.25 per unitFixed cost per unit = $1.25 per unitIncremental cost per unit = variable cost per unit + fixed cost per unit = $2.25 + $1.25 = $2.50 per unitTotal cost for special order = 15,000 units x $2.50 per unit = $37,500Incremental cost of accepting the additional business = Total cost of special order - Revenue from special order = $37,500 - $45,000 = -$7,500Since the incremental cost is negative, it means that accepting the special order would actually decrease the total costs and increase profitability. Therefore, the best choice is E.

Definitions

Learning Objectives

Learning Objectives

Related questions