Question

Lta company produces a single product. the cost of producing and selling a single unit of this product at the company's normal activity level of 60,000 units per year is: direct materials $ 5.10 direct labor $ 3.80 variable manufacturing overhead $ 1.00 fixed manufacturing overhead $ 4.20 variable selling and administrative expense $ 1.50 fixed selling and administrative expense $ 2.40 the normal selling price is $21 per unit. the company's capacity is 75,000 units per year. an order has been received from a mail-order house for 15,000 units at a special price of $14.00 per unit. this order would not affect regular sales. required: 1. if the order is accepted, by how much will annual profits be increased or decreased? (the order will not change the company's total fixed costs.)

Answer 1

The company's profits will increase by $39,000.

Revenues per unit from the new order is $14.

The company has a total variable cost of $11.4 per unit.

The new order quantity is 15,000.

This results in a contribution margin of $2.6 per unit ( $14 - $11.4).

Since the order will not increase the company's fixed costs, the company's profits will increase to the extent of ($2.6 × 15,000).