Answer:
A special order for 1,125 units generates $1,250 in extra profit. This order (1,500 units) increases profits by $2,000
Explanation:
special order for 1,500 units at $5
regular production 7,500 units at $6
spare capacity 2,500 units (total capacity = 7,500 / 75% = 10,000)
production costs of regular units:
- variable costs = $3 per unit
- fixed costs = $1.50 per unit
- total = $4.50 per unit
new machine is required that costs $1,000
regular fixed costs are not affected by special order
profit from special order:
- total revenue = 1,500 x $5 = $7,500
- relevant costs = 1,500 x $3 = ($4,500)
- new machine = ($1,000)
- additional profit from special order = $2,000
But Minor only wishes to earn $1,250 from special order, so the number of units should be:
($1,000 + $1,250) / ($5 - $3) = $2,250 / $2 = 1,125 units
