Question

Special Order Poppy has received a special order for 1,000 units of its product at a special price of $125. The product currently sells 18,000 units for $150 and has the following manufacturing costs:

Per unit Direct materials $45
Direct labor 30
Variable manufacturing overhead 35
Fixed manufacturing overhead 25
Unit cost $135

Assume that Poppy has sufficient capacity to fill the order without harming normal production and sales.

a. If Poppy accepts the order, what effect will the order have on the company’s short-term profit?
b. If Poppy accepts the order and fills it completely, what effect will the order have on the company’s short-term profit?

Answer 1

a. The special order will result in a loss of $10,000 in short-term profit. b. Filling the special order completely will result in a short-term loss of $10,000.

Step-by-step explanation:

a. To determine the effect of accepting the special order on the company's short-term profit, we need to compare the profit at the current selling price to the profit from the special order. The current profit per unit is $150 (selling price) - $135 (unit cost) = $15. So, the current total profit for 1,000 units is 1,000 units * $15 = $15,000. The special order price is $125 per unit, so the profit per unit for the special order is $125 - $135 (unit cost) = -$10. Therefore, the total profit for the special order is 1,000 units * -$10 = -$10,000.

b. If the special order is filled completely, the effect on the company's short-term profit will be a loss of -$10,000.