Answer:
production level 30,000 units
production costs at that level:
- direct materials $15 per unit = $450,000
- direct labor $8 per unit = $240,000
- variable manufacturing overhead $3 per unit = $90,000
- fixed overhead $9 per unit = $270,000
- variable selling expense $4 per unit = $120,000
- fixed selling expense $6 per unit = $180,000
- total costs per unit $45 = $1,350,000
sales price $50 per unit, profit $5 per unit = $150,000
fixed manufacturing overhead constant between 25,000 - 30,000 units
<u>scenario 1:</u>
due to a recession, sales decrease to 25,000 units:
special order for 5,000 at $42 per unit
additional costs = $10,000 for special machine
without special order with special order
total units sold 25,000 30,000
total revenue $1,250,000 $1,460,000
- variable px costs -$650,000 -$780,000
<u>- fixed ma. overhead -$270,000 -$270,000</u>
gross profit $330,000 $410,000
- variable selling exp. -$100,000 -$115,000
- fixed selling exp. -$180,000 -$180,000
<u>- special machine $0 -$10,000</u>
net profit $50,000 $105,000
profits will increase by $50,000 if the special order is accepted
<u>scenario 2:</u>
normal sales levels 30,000 units, Army wishes to purchase 5,000 units:
special order for 5,000 at production costs + $1.80
additional costs = $10,000 for special machine
without special order with special order
total units sold 30,000 30,000
total revenue $1,500,000 $1,434,000
- variable px costs -$780,000 -$780,000
<u>- fixed ma. overhead -$270,000 -$270,000</u>
gross profit $450,000 $384,000
- variable selling exp. -$120,000 -$100,000
<u>- fixed selling exp. -$180,000 -$180,000</u>
net profit $150,000 $104,000
profits will decrease by -$46,000 if the Army's special order is accepted
