Question

Minor Electric has received a special one-time order for 1,200 light fixtures (units) at $18 per unit. Minor currently produces and sells 6,000 units at $19.00 each. This level represents 75% of its capacity. Production costs for these units are $24.00 per unit, which includes $16.00 variable cost and $8.00 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $800 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. If Minor wishes to earn $1,600 on the special order, the size of the order would need to be:

Answer 1

the size of the special order should be 1,200 in order to generate profits of $1,600

Step-by-step explanation:

special order 1,200 units at $18 per unit = $21,600

current spare capacity 2,000 units

relevant production costs:

• variable costs $16 per unit
• additional fixed costs $800

total relevant costs = ($16 x 1,200) + $800 = $20,000

profits generated by special order = $21,600 - $20,000 = $1,600

with this special order (1,200 units) you can make $1,600 in profits