Question

It costs Garner Company $12 of variable and $5 of fixed costs to produce one bathroom scale which normally sells for $35. A foreign wholesaler offers to purchase 3,000 scales at $15 each. Garner would incur special shipping costs of $1 per scale if the order were accepted. Garner has sufficient unused capacity to produce the 3,000 scales. If the special order is accepted, what will be the effect on net income? Question 5 options:
A) $6,000 increase
B) $6,000 decrease
C) $9,000 decrease
D) $45,000 increase

Answer 1

Answer:

Option (A) is correct.

Explanation:

If the Garner Company manufactures the scales, the net income of Garner Company will be:

= Total Sales - Variable Cost - Fixed cost

= (3,000 scales × $35) - (3,000 scales × $12) - (3,000 scales × $5)

= $105,000 - $36,000 - $15,000

= $54,000

If the Garner Company purchases the scales from foreign wholesaler, the net income of Garner Company will be:

= Total Sales - cost of goods sold - Shipping cost

= (3,000 scales × $35) - (3,000 scales × $15) - (3,000 scales × $1)

= $105,000 - $45,000 - $3,000

= $57,000

Comparing the two options,

If the Garner Company purchases the scales directly from foreign wholesaler the net income of Garner company increases ($57,000 - $54,000) $3,000.

Here the shipping costs of purchases we considered as a Costs (Cost of goods sold).

If we couldn’t consider shipping costs are the part of Cost of goods sold, then the net income of Garner Company would be increases by ($60,000 - $54,000) $6,000.