Question

"The cost of goods sold includes $2,400,000 of fixed manufacturing overhead; the operating expenses include $200,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $15.00 per unit has been made to Jasmine. Fortunately, there will be no additional fixed costs associated with the order and Jasmine has sufficient capacity to handle the order. How much will operating profits increase if Jasmine accepts the special order

Answer 1

$200,000

Step-by-step explanation:

The computation of the operating profit increase in case of special order accepted is

= Special order units × contribution margin per unit

where,

Special order units = 50,000 units

And, the contribution margin per unit is

= Selling price per unit - variable cost per unit

The selling price per unit is $15 per unit

And, the variable cost per unit is computed below:

Variable Cost of Goods Sold

= Cost of goods sold - fixed manufacturing overhead

= $6,400,000 - $2,400,000

= $4,000,000

Variable Cost of Goods Sold per unit = $4,000,000 ÷ 400000 = $10 per unit

Variable Operating Expenses

= Operating expenses - fixed marketing expenses

= $600,000 - $200,000

= $400,000

Variable Operating expenses per unit = $400,000 ÷ 400000 = $1 per unit

So, the increase in operating profits is

= $50,000 × $4 per unit

= $200,000