Question

Crandle Manufacturers Inc. is approached by a potential customer to fulfill a oneminustimeminusonly special order for a product similar to one offered to domestic customers. The company has excess capacity. The following per unit data apply for sales to regular​ customers: Variable​ costs: Direct materials $ 130 Direct labor 100 Manufacturing support 105 Marketing costs 65 Fixed​ costs: Manufacturing support 185 Marketing costs 55 Total costs 640 Markup ​(50​%) 320 Targeted selling price $ 960 What is the change in operating profits if the oneminustimeminusonly special order for 1 comma 100 units is accepted for $ 560 a unit by​ Crandle? A. $ 176 comma 000 decrease in operating profits B. $ 175 comma 360 increase in operating profits C. $ 176 comma 000 increase in operating profits D. $ 175 comma 360 decrease in operating profits

Answer 1

Answer:

C. $176000 increase in operating profits

Explanation:

Contribution margin is the ability of a company to cover its variable costs using revenue. It is calculated as selling price per unit minus variable cost per unit. The amount left covers fixed costs or is profit.

Contribution margin per unit = 560 - (130 + 100 + 105 + 65) = $160

Profit increase = $160 x 1100 units = $176000

This is profit because the company already covers it’s fixed costs selling to regular customers since it had total costs of $640 per unit and sold at $960 (with a 50% mark up).