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Homework answers / question archive / Company manufactures a product that has per-unit costs of $48 for materials, and $90 for labor, and $102 for variable overhead, and $40 for fixed overhead
Company manufactures a product that has per-unit costs of $48 for materials, and $90 for labor, and $102 for variable overhead, and $40 for fixed overhead. They received a special order for 500 units at a price of $275 each. If they accept the order, how with the company’s profit change?
Group of answer choices
Increase by $17,500
Increase by $7,500
Decrease by $2,500
Increase by $37,500
Answer : Increase by $17,500
Explanation :
Contribution Margin Income Statement of Special Order
| Sales Revenue | $137,500 |
| Less : Total Variable Cost | ($120,000) |
| Contribution Margin | $17,500 |
| Less : Fixed Cost | ($0) |
| Net Profit | $17,500 |
Selling Price of Special Order = $275 per unit (Given)
Number of Units of Special Order = 500 (Given)
Sales Revenue from Special Order = Selling Price of Special Order * Number of Units of Special Order
= $275 * 500
= $137,500
Material Cost per unit = $48 (Given)
Labor Cost per unit = $90 (Given)
Variable Overhead Cost per unit = $102 (Given)
Fixed Overhead Cost per unit = $40 (Given)
The Company will incur Fixed Overhead Cost irrespective of whether the special order is accepted or not.
Therefore, Fixed Overhead Cost will not be considered in the special order.
Therefore,
Total Variable Cost per unit = Materials Cost per unit + Labor Cost per unit + Variable Overhead Cost per unit
= $48 + $90 + $102
= $240
Total Variable Cost of Special Order = Total Variable Cost per unit * Number of Units of Special Order
??????= $240 * 500
= $120,000
??????Contribution Margin of Special Order = Sales Revenue from Special Order - Total Variable Cost of Special Order
= $137,500 - $120,000
= $17,500
Since, no extra fixed cost is incurred in the special order.
Increase in Profit = Contribution Margin of Special Order
= $17,500
