Question

Cranberry has received a special order for 100 units of its product at a special price of $2,100 per unit. The product normally sells for $2,800 and has the following manufacturing costs: Per unit Direct materials $ 840 Direct labor 420 Variable manufacturing overhead 560 Fixed manufacturing overhead 700 Unit cost $ 2,520 Assume that Cranberry has sufficient capacity to fill the order without harming normal production and sales. If Cranberry accepts the order, what effect will the order have on the company's short-term profit

Answer 1

Cranberry will have a financial advantage of $28,000 if it accepts the order

Step-by-step explanation:

Note that "Cranberry has sufficient capacity to fill the order without harming normal production and sales" this means that the fixed costs will not change as production and sales remains in relevant range.

To determine the effect that the order will have on the company's short-term profit we consider Incremental Costs and Revenues that result from the special order.

Incremental Costs and Revenues - special order for 100 units

Sales ( 100 units × $2,100 per unit) $210,000

Less Cost of Sale : ($182,000)

Direct materials ( 100 units × $ 840 per unit) $84,000

Direct labor ( 100 units × $ 420 per unit) $42,000

Variable manufacturing overhead ( 100 units × $ 560 per unit) $56,000

Gross Profit $28,000

Therefore Cranberry will have a financial advantage of $28,000 if it accepts the order

Answer 2

Answer: Cranberry will record a $28,000 profit increase.

Step-by-step explanation:

GIVEN the following details ;

Direct materials per unit = $840

Direct labor per unit = $420

Variable manufacturing overhead = $560

Fixed manufacturing overhead = $700

Units of special order = 100

Price per unit of special order = $2,100

What effect will the order have on the company's short-term profit?

NOTE : CRANBERRY IS ASSUMED TO HAVE SUFFICIENT PRODUCTION CAPACITY SUCH THAT ACCEPTING THE SPECIAL ORDER OFFER WOULD NOT DISRUPT NORMAL PRODUCTION AND SALES.

Cost incurred on production per unit:

$(840 + 420 + 560) = $1820

Total production cost of special order:

Number of units × cost per unit

100 × $1820 = $182,000

Sales Revenue on special order:

Number of units × selling price

100 × $2,100 = $210,000

Short term profit :

(Sales Revenue on special order - production cost of special order)

$(210,000 - 182,000) = $28,000

Therefore cranberry will record a $28,000 profit increase.