Question

At Pharoah Electronics, it costs $33 per unit ($19 variable and $14 fixed) to make an MP3 player that normally sells for $55. A foreign wholesaler offers to buy 3,750 units at $28 each. Pharoah Electronics will incur special shipping costs of $1 per unit.

Required:
Assuming that Pharoah Electronics has excess operating capacity, indicate the net income (loss) Pharoah Electronics would realize by accepting the special order.

Answer 1

Answer:

                              Reject Order Accept order     Net Income

                                                                                 Increase (Decrease)

Revenues =                     $0             $105,000             $105,000

                                                  (3750 units x $28)

Costs-Manufacturing =   $0              -$71,250            -$71,250

                                                  (3750 units x $19 (VC) )

Shipping                          $0               -$3,750             -$3,750

                                                   (3750 units x $1)

Net Income                      $0              $30,000            $30,000

Pharoah Electronic would realize the net Income of $30,000 by accepting the special order. Hence, the special order should be accepted.