Question

The normal selling price is $20 per unit. Wiacek capacity is 100,000 units per year. Wiacek has received a request for a special order of 5,000 units for $14 each. The special order would have no effect on Wiacek other sales. The customer would like modifications to the product that would increase direct material costs by $1.00 per unit. The order will not change Wiacek total fixed costs. If the order is accepted, by how much will annual profits increase

Answer 1

annual profits will increase by $20,500

Step-by-step explanation:

total relevant costs per unit:

• direct materials $3.10
• additional direct materials $1.00
• direct labor $2.70
• variable manufacturing overhead $1.10
• variable selling and administrative expenses $2.00
• total $9.90

additional profit generated by special order = (selling price - relevant costs) x number of units = ($14.00 - $9.90) x 5,000 units = $4.10 x 5,000 = $20,500

Since fixed costs are not affected by the special order, they should not be included in this analysis.