Question

CoolAir Corporation manufactures portable window air conditioners. CoolAir has the capacity to manufacture and sell 80,000 air conditioners each year but is currently only manufacturing and selling 60,000. The following per unit numbers relate to annual operations at 60,000 units: Per Unit Selling price $125 Manufacturing costs: Variable $25 Fixed $40 Selling and administrative costs: Variable $10 Fixed $15 The City of Clearwater would like to purchase 3,000 air conditioners from CoolAir (special order) but only if they can get them for $75 each. Variable selling and administrative costs on this special order will drop down to $2 per unit. This special order will not affect the 60,000 regular sales and it will not affect the total fixed costs. The annual financial advantage (disadvantage) for the company as a result of accepting this special order from the City of Clearwater should be:

Answer 1

Answer:

The annual financial advantage for the company as a result of accepting this special order from the City of Clearwater should be $144,000.

Explanation:

To know the net effect that this special order, we have to list all the differential cost that the company will incur for this additional sale.

The sell price is $75.

The fixed costs are not affected, so we will not include them in the calculation.

The variable manufacturing cost is $25/unit.

The variable selling and administrative cost for this special order are $2/unit.

There are no other cost affected for the acceptance of this order.

Then, the contribution margin of this special order (3,000 units) is:

$CM=Q\cdot(Price-Costs)=3,000*(75-(25+2))=3,000*48\\\\CM=144,000$

The annual financial advantage for the company as a result of accepting this special order from the City of Clearwater should be $144,000.

Answer 2

Answer:

The annual financial advantage is $147000

Explanation:

Number of units = 60,000

Unit selling price = $125 per unit

Manufacturing:

Variable = $25

Fixed cost = $40

Selling and administrative costs:

Variable = $10

Fixed costs = $15

Total selling cost = 60000 x $125 = $7500000

Total manufacturing cost = 60000 x $65 = $3900000

Total selling and administrative cost = 60000 x $25 = $1500000

Gain = $7500000 - $3900000 - $1500000 = $2100000

City of Clearwater's special order

Total unit requested = 3,000

Buying price = $75 each

selling and administrative costs:

Variable = $2

Manufacturing costs:

Variable = $25

Total sales cost = 3000 x $75 = $225000

Total selling and administrative costs = 3000 x $2 = $6000

Total manufacturing costs = 3000 x $25 = $75000

Gain = $225000 - $3000 - $75000 = $147000

The annual financial advantage for the company as a result of accepting the special order from the City of Clearwater is the extra money made on the special order = $147000