Trescott company had the following results of operations for the past year:
Sales (20,000 units at $22) $440,000
Direct materials and direct labor $200,000
Overhead (40% variable) 100,000
Selling and Administrative expenses (all fixed) 92,000 (392,000)
Operating income $ 48,000
A foreign company (whose sales will not affect Trescott's market) offers to buy 3,000 units at $17.00 per unit. In addition to the variable manufacturing costs, selling these units would increase fixed overhead by $500 and selling and administrative costs by $1,000. If Trescott accepts the offer, its profits will increase (decrease) by:
Answer : If Cornish accepts this order, its profits will increase by $13,500.
Calculation of Variable Costs per unit :
Direct Material and labor per unit = Total Direct Material and labor / No. of units sold
Direct Material and labor per unit =200000/20000 = $10
Variable Overhead per unit = Total Variable Overhead / No. of units sold
Variable Overhead per unit = (100000*0.4)/20000 = $2
Variable Cost per unit = $12 (Direct Material and labor per unit + Variable Overhead per unit)
Selling price of new order = $17 per unit
No. of units = 3,000
Increase in Fixed Costs = Inc in fixed overhead + inc in S&A Expenses
Increase in Fixed Costs = $1500 (500 + 1000)
Total Cost of new order = (Variable Cost per unit * No. of units) + Increased Fixed Cost
Total Cost of new order = (12*3000) + 1500 = $37,500
Total Revenues from new order = Selling price per unit * No. of units sold
Total Revenues = $51,000 (17 *3,000)
Profit from new order = Total Revenues from new order - Total Cost of new order
Profit from new order = 51000 - 37500 = $13,500