Question

Black Horse Corporation manufactures a product with the following full unit costs at a volume of 2000 units:

Direct Materials $100

Direct Labor $40

Manufacturing Overhead (30% variable) $75

Selling expenses (50% variable) $25

Administrative expenses (10% variable) $40

Total Per unit $280

A company recently approached Black Horse’s management with an offer to purchase 225 units for $275 each. Black horse currently sells the product to dealers for $400 each. Black horse’s capacity is sufficient to produce the extra 225 units. No selling expenses would be incurred on the special order.

If Black Horse's management accepts the offer, profits will: Select one:

A. Increase by $33,40.
B. Decrease by $24,412.50
C. Decrease by $60,000
D. Increase by $24,412.50

Answer 1

D. Increase by $24,412.50

Step-by-step explanation:

The computation of the increase in profit is shown below:

= Number of units for purchase × contribution margin per unit

where,

Number of units for purchase is 225 units

And, the contribution margin per unit = Selling price per unit - variable cost per unit

The selling price per unit is $275

And, the variable cost per unit is

= $100 + $40 + $75 × 30% + $25 × 50% + $40 × 10%

= $100 + $40 + $22.5 + $4

= $166.50

So, the contribution margin per unit is

= $275 - $166.50

= $108.50 per unit

So, the increase in profit is

= 225 units × $108.50

= $24,412.50