Question

The following information relates to the Magna Company for the upcoming year, based on 402,000 units. Amount Per Unit Sales $ 10,452,000 $ 26.00 Cost of goods sold 6,432,000 16.00 Gross margin 4,020,000 10.00 Operating expenses 462,300 1.15 Operating profits $ 3,557,700 $ 8.85 The cost of goods sold includes $1,360,000 of fixed manufacturing overhead; the operating expenses include $116,000 of fixed marketing expenses. A special order offering to buy 66,000 units for $15.90 per unit has been made to Magna. Fortunately, there will be no additional operating expenses associated with the order and Magna has sufficient capacity to handle the order. How much will operating profits be increased if Magna accepts the special order?

Answer 1

Ans. The operating profits will increased by $216,683.58 by increasing the sales by 66,000 units ( $1,049,400)

Step-by-step explanation:

Hi, first we have to consider that Magna has sufficient capacity to handle this additional order, it means that its manufacturing overhead is not going to increase, in other words, our costs of goods sold, for the first 402,000 units are going to be $13/unit (COGS no manufacturing overhead)+ $1,360,000 of fixed manufacturing overhead.

We could do the same with the operating expenses, but there is no use for that since no additional operating expenses (as a whole) need to be added for this additional 66,000 units.

Before this additional 66k sale, this is what we have.

Unit

Amount 402,000

Sales $26 $10,452,000

COGS(no overhead) $13 $5,072,000

Fixes man overhead $3 $1,360,000

Gross Margin $10 $4,020,000

Oper expenses $0.86 $346,300

Fixed Marketing expense $0.29 $116,000

Operating profit $3,557,700

Now, let´s see how it looks when we add this additional 66k units to the P&L statement.

Unit

Amount 468,000

Sales $26 $10,452,000

Sales( at $15.90) $15.9 $ 1,049,400

COGS(no overhead) $13 $5,904,716

Fixes man overhead $3 $1,360,000

Gross Margin $10 $4,236,684

Oper expenses $0.86 $346,300

Fixed Marketing expense $0.29 $116,000

Operating profit $3,774,383

Therefore, the company´s operating profits will increase in $216,683.58

($3,774,383.58 - $3,557,700).

Best of luck.