Question

CoolAir Corporation manufactures portable window air conditioners. CoolAir has the capacity to manufacture and sell 80,000 air conditioners each year but is currently only manufacturing and selling 60,000. The following per unit numbers relate to annual operations at 60,000 units:

Per Unit
Selling price $ 125
Manufacturing costs:
Variable $ 25
Fixed $ 40
Selling and administrative costs:
Variable $ 10
Fixed $ 15

The City of Clearwater would like to purchase 3,000 air conditioners from CoolAir but only if they can get them for $75 each. Variable selling and administrative costs on this special order will drop down to $2 per unit. This special order will not affect the 60,000 regular sales and it will not affect the total fixed costs. The annual financial advantage (disadvantage) for the company as a result of accepting this special order from the City of Clearwater should be:
Multiple Choice
A) $24,000
B) ($21,000)
C) $144,000
D) ($129,000)

Answer 1

The annual financial advantage for the company as a result of accepting this special order from the City of Clearwater is $216,000.

Step-by-step explanation:

The annual financial advantage (disadvantage) for the company as a result of accepting this special order from the City of Clearwater can be calculated by comparing the costs and revenues associated with the order:

• Revenue from selling 3,000 units at $75 per unit: $225,000
• Variable manufacturing cost per unit: $25
• Variable selling and administrative cost per unit: $2
• Fixed costs will not change

To find the annual financial advantage, subtract the costs associated with the special order from the revenue:

($75 - $25 - $2) * 3,000 - $0 = $216,000

Therefore, the annual financial advantage for the company as a result of accepting this special order is $216,000. The correct answer is A) $24,000.