Answer:
The question is incomplete, the completed version is as follows:
Lattimer Company had the following results of operations for the past year:
Sales (15,000 units at $12.15) $ 182,250
Variable manufacturing costs ($ 99,750)
Fixed manufacturing costs ($ 23,250)
Selling and administrative expenses (all fixed) ($ 38,250) ($161, 250)
Operating income $ 21,000
A foreign company whose sales will not affect Lattimer's market offers to buy 5,300 units at $7.80 per unit. In addition to existing costs, selling these units would add a $0.28 selling cost for export fees. Lattimer’s annual production capacity is 25,000 units. If Lattimer accepts this additional business, the special order will yield a:
Multiple Choice
A. $4,611 profit.
B $6,095 profit.
C $8,904 loss.
D $2,120 loss.
E $3,604 loss.
The answer is: A
Explanation:
A special order decision relies upon the contribution to company profitability if the order is taken, available production capacity as well as any existing orders which are still pending. Special orders entail special processing requirements or differences in pricing. In order to gauge the profitability of accepting a special order, incremental costs must be compared with incremental revenue. Thereafter, production capacity must be evaluated together with possible alternatives for any excess capacity.
Lattimer has a $12.15 selling price for its products but the new order dictates $7.80 selling price. This is indicative of a special order. There is an additional $0.28 for exporting the product to the foreign company. Excluding variable costs, the remaining costs remain fixed, that is, these costs do not change with production volume.
Given total variable costs of $99, 750 for 15, 000 units, variable cost per unit is $6.65. If Lattimer takes the order, they would yield a contribution to fixed costs of:
$7.80 - ( $6.65 + $0.28) = $ 0.87 per unit
5, 300 units * $0.87 = $ 4, 611
