Question

Lattimer Company had the following results of operations for the past year:

Sales (15,000 units at $11.85) $177,750
Variable manufacturing costs $95,250
Fixed manufacturing costs 18,750
Selling and administrative expenses (all fixed) 33,750 (147,750)
Operating income $30,000
A foreign company whose sales will not affect Lattimer's market offers to buy 4,700 units at $7.20 per unit. In addition to existing costs, selling these units would add a $0.22 selling cost for export fees. If Lattimer accepts this additional business, the special order will yield a:__________
a) $3,995 profit.
b) $1,880 loss.
c) $7,614 loss.
d) $2,961 profit.
e) $2,914 loss.

Answer 1

Option D is correct

Profit = $2,961

Step-by-step explanation:

A special order should be accepted where it would result in additional net financial advantage

The relevant cash flows associated with the special order decision include:

1. Sales revenue from special order
2. Variable cost of the special order

Variable cost of export = unit manufacturing cost + export fee per unit

Unit variable manufacturing cost = 95,250/15,000 = $6.35

Variable cost of export = $6.35 + 0.22 =6.57

$

Sales revenue from special order ( $7.20 × 4,700) = 33,840

Variable cost from special order (6.57 × 4,700) = (30,879)

Contribution from special order 2,961