Question

Lasso Corporation manufactures a product with the following full unit costs at a volume of 4,000 units: Direct materials $ 200 Direct labor 80 Manufacturing overhead (30% variable) 150 Selling expenses (50% variable) 50 Administrative expenses (10% variable) 80 Total per unit $560 A company recently approached Lasso’s management with an offer to purchase 400 units for $500 each. Lasso currently sells the product to dealers for $800 each. Lasso’s capacity is sufficient to produce the extra 400 units. No selling expenses would be incurred on the special order. If Lasso’s management accepts the offer, profits will:

Answer 1

Answer:

Increases by $66,800.

Explanation:

Given that,

Direct materials = $ 200

Direct labor = 80

Manufacturing overhead (30% variable) = 150

Selling expenses (50% variable) = 50

Administrative expenses (10% variable) = 80

Total per unit = $560

If accept this offer,

Total cost:

= Material + Labor + Manufacturing overhead + Administrative

= $200 + $80 + (30% × 150) + (10% × 80)

= $200 + $80 + $45 + $8

= $333

Contribution margin per unit:

= Selling price - Variable cost

= $500 - $333

= $167

Increase in profits:

= Contribution margin per unit × Number of units offer to purchase

= $167 × 400 units

= $66,800