Question

A company sells 15,000 units of its single product annually. Annual revenues are $450,000, variable costs are $315,000, and fixed costs are $125,000. The company is considering whether to accept a special order for 3,000 units at the price of $24 each. Fixed costs will remain unchanged if the company accepts the order. The company only has production capacity to make a total of 16,000 units of the product in any given year. If the company accepts the special order, what is the impact on the company’s profit?

Answer 1

Decrease in profit = $9,000

Step-by-step explanation:

The impact on the profit would be the sum of the increase in contribution from the special order less the lost contribution by forgoing the standard order.

Accepting the special order of 3,000 units would mean losing standard contribution on 2,000 units from the current sales unit of 15,000. Remember the company only has excess capacity of 1, 000 units i.e (16000-15,000) So, the additional 2,000 units would need to be forgone at standard price.

Variable cost per unit = 315,000/15,000 = $21

Standard selling price = 450,000/15,000 = $30

Special order price = $24

$

Additional contribution from special order = (24-21) × 3,000 = 9,000

Lost contribution from forgoing standard order (30-21) × 2000 =(18,000)

Decrease in profit (9,000)

By accepting the special order, the company would lose $9,000 of its profit