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Special Order Poppy has received a special order for 1,000 units of its product at a special price of $125. The product currently sells 18,000 units for $150 and has the following manufacturing costs:

Per unit Direct materials $45
Direct labor 30
Variable manufacturing overhead 35
Fixed manufacturing overhead 25
Unit cost $135

Assume that Poppy has sufficient capacity to fill the order without harming normal production and sales.

a. If Poppy accepts the order, what effect will the order have on the company’s short-term profit?
b. If Poppy accepts the order and fills it completely, what effect will the order have on the company’s short-term profit?

Respuesta :

facundobuzzetti

Answer:

Results are below.

Explanation:

1) Because it is a special offer, and there is unused capacity, we will not take into account the fixed costs:

Effect on income= 1,000*125 - 1,000*(45 + 30 + 35)

Effect on income= $15,000

2) Now, the company doesn't have unused capacity. It only has 500 units in excess. We have to take into account the fixed costs and the original selling price of the units.

Effect on income= 1,000*125 - 1,000*(45 + 30 + 35) - 500*(25 + 25)

Effect on income= -$10,000

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