Question

The following information relates to a product produced by Bayfield Company:Direct materials $50Direct labor 35Variable overhead 30Fixed overhead 40Unit cost $155Fixed selling costs are $1,000,000 per year. Although production capacity is 900,000 units per year, Bayfield expects to produce only 800,000 units next year. The product normally sells for $180 each. A customer has offered to buy 60,000 units for $150 each. The customer will pay the transportation charge on the units purchased.Requirements:1) Compute the effect on income if Bayfield accepts the special order.2) If Bayfield accepts the special order, how much could normal sales drop before all of the differential profits disappear?

Answer 1

1. Effect on Income = Additional Order*(Purchase Price - (Direct Material + Direct Labor + Variable Overhead))

Effect on Income = 60,000*(150 - (50+35+30))

Effect on Income = 60,000*(150 - 115)

Effect on Income = 60,000 units * $35

Effect on Income = $2,100,000

Net Income would increase by $2,100,000

2. Drop in Sales = Increase in Net Income/(Normal Sales Price - Total Variable Costs)

Drop in Sales = $2,100,000/(180 - 115)

Drop in Sales = $2,100,000/65

Drop in Sales = 32307.69231

Drop in Sales = $32,307.69