It costs Lil Beasty Company $17 of variable costs and $3 of fixed costs to produce its product. The company currently has unused capacity. The product sells for $25. Loner Industries offers to purchase 5,000 units at $19 each. In the deal, Lil Beasty will incur special shipping costs of $1.50 per unit. If the special offer is accepted and produced with unused capacity, net income will:

$2,500 Increase

Explanation:

Lil Beasty Company

Variable cost per unit ($17 + $1.50) $18.50

Income per unit ($19 – $18.50) $0.50

The total increase in net income ($.50 X 5,000 units) $2,500

Therefore we have increase $2,500 meaning If the offer is accepted with unused capacity, net income will increase by $2,500. The variable cost per unit will be $18.50 ($17 + $1.50); the income per unit is $.50 ($19 – $18.50); and the total increase in net income will be $2,500 ($.50 X 5,000 units)

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