Question

Radar Company sells bikes for $350 each. The company currently sells 4,200 bikes per year and could make as many as 5,000 bikes per year. The bikes cost $270 each to make; $155 in variable costs per bike and $115 of fixed costs per bike. Radar received an offer from a potential customer who wants to buy 775 bikes for $380 each. Incremental fixed costs to make this order are $51,000. No other costs will change if this order is accepted. Compute Radar’s additional income (ignore taxes) if it accepts this order.

	incremental amount per unit	incremental fixed costs	incremental income from new business
sales	$350		??
variable costs	195		??
contribution margin	??		??
fixed costs		$40,000	$40,000
incremental income (loss)			??
the company should			??

Answer 1

	Incremental amount per unit	Incremental fixed costs	Incremental income from new business
sales	$ 380.00		$294,500.00*
variable costs	$ 155.00		$120,125.00
contribution margin	$ 225.00**		$174,375.00
fixed costs		$51,000.00	$   51,000.00
incremental income (loss)			$123,375.00
the company should			Accept the offer

*775 x 380

**380-155

The additional income is a positive number so its better to accept the offer.