Question

Pericloud Company produces a product that has a regular selling price of $500 per unit. At a typical monthly production volume of 4,000 units, the product's average unit cost of goods sold amounts to $300. Included in this average is $150,000 of fixed manufacturing costs. All selling and administrative costs are fixed and amount to $40,000 per month.

Pericloud Company has just received a special order for 2,000 units at $280 per unit. The buyer will pay for transportation, and the regular selling price will not be affected if Pericloud accepts the order.

Assuming Pericloud Company has excess capacity, the effect on profits of accepting the order would be a:

a.$72,000 increase.

b.$35,000 increase.

c.$72,000 decrease.

d.$35,000 decrease.

Answer 1

b. $35,000 increase

Step-by-step explanation:

We are given the following as

Average cost per Unit = $300

Cos of fixed Manufacturing per Unit ($150000/$4000)

= $-37.5

Variable Cost of Manufacturing Per Unit = $262.5

Price for special Order per Unit = $280

Profit per Unit of Special order =($280-$252.50)

= $17.5

Special order Units = $2000

Total Profit from Special Order = ($2000×$27.50 )

= $35,000

Answer 2

Correct answer is b. $35,000 increase.

Step-by-step explanation:

Average cost per Unit 300

Fixed Manufacturing ocst per Unit 150000/4000 -37.5

Variable Cost of Manufactring Per Unit 262.5

Special Order Price per Unit 280

Profit per Unit of Special order (280-252.50) 17.5

Special order Units 2000

Total Profit from Special Order 2000*27.50 35000