Question

Waterways mass-produces a special connector unit that it normally sells for $3.90. It sells approximately 37,500 of these units each year. The variable costs for each unit are $2.20. A company in Canada that has been unable to produce enough of a similar connector to meet customer demand would like to buy 15,300 of these units at $2.50 per unit. The production of these units is near full capacity at Waterways, so to accept the offer from the Canadian company would require temporarily adding another shift to its production line. To do this would increase variable manufacturing costs by $0.30 per unit. However, variable selling costs would be reduced by $0.20 a unit.

An irrigation company has asked for a special order of 1,900 of the connectors. To meet this special order, Waterways would not need an additional shift, and the irrigation company is willing to pay $3.00 per unit.

(a)

What are the consequences of Waterways agreeing to provide the 15,300 units to the Canadian company? Would this be a wise “special order” to accept?

Waterways                                                                       shouldshould not accept the special order because net income                                                                       increasesdecreases by $  . Waterways should notshould accept the special order because net income decreasesincreases by $ . What would be the consequences of accepting both special orders? Accepting both special orders would increasedecrease net income by $ .

Answer 1

To calculate increase in income we will consider only incremental Revenue and cost

canadian company order

Incremental costs = Variable cost+increase-decrease

$2.20-$0.20+$0.30

=$2.30 per unit

Incremental revenue= $2.50 per unit

Net income = Incremental Revenue-Incremental cost

=($2.50-$2.30)*15,300

=$3,060 Increase in net income

Waterways should accept the special order because net income                                                                       increases by $ 3,060

2.Irrigation company order

=Incremental Revenue- Incremental cost

=($3-$2.20)*1900

=$1,520

Waterways should accept the special order because net income                                                                       increases by $ 1,520

3. If both the orders are accepted total net income would increase by ($1,520+$3,060) =$4,580

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