Question

A company makes a single product that is normally sells for $65/unit. It has the capacity to produce 100,000 units per year, but currently produces only 70,000. Per-unit costs associated with the product at an annual production level of 70,000 are below:

Variable production cost per unit $22
Variable selling cost per unit $16
Fixed production cost per unit $9
Fixed selling cost per unit $15
A foreign distributor wants to buy 2,000 units and has offered to pay $43 each. Additional information:
If the company accepts this order, it would incur $10,000 in additional legal costs to comply with export regulations.
No selling costs would be incurred for this order.
What would be the total financial impact of accepting this offer?

Answer 1

The financial impact of accepting the foreign distributor's offer is a positive $32,000, calculated by deducting the total costs of $54,000 from the total revenues of $86,000.

Step-by-step explanation:

The total financial impact of accepting the special order from the foreign distributor can be calculated by considering the revenue from the sale, minus the variable production costs, additional legal costs, and the avoidance of variable selling costs, since these will not be incurred.

The revenue from selling 2,000 units at $43 each is $86,000. The variable production cost is $22 per unit, resulting in a total of $44,000 for 2,000 units. Since no variable selling costs will be incurred, we only need to add the extra legal costs of $10,000. Therefore, the total cost is the sum of the variable production costs and the legal costs, which is $54,000.

To find the financial impact, we subtract the total costs from the total revenue which gives us a positive financial impact of $32,000 for the company if it accepts the foreign distributor's offer.

Final answer in two line explanation: The financial impact of accepting the offer is positive, with total revenue of $86,000 minus total costs of $54,000 resulting in a net benefit of $32,000 to the company in 200 words.