Question

Minor Electric has received a special one-time order for 600 light fixtures (units) at $12 per unit. Minor currently produces and sells 3,000 units at $13.00 each. This level represents 75% of its capacity. Production costs for these units are $15.00 per unit, which includes $10.00 variable cost and $5.00 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $650 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. If Minor wishes to earn $1,150 on the special order, the size of the order would need to be:

Answer 1

Answer:

To earn $1,150 the order should be 900 units.

Explanation:

Giving the following information:

Selling price= $12

Unitary variable cost= $10

Incremental fixed costs= $650

Desired profit= $1,150

Because it is a special order, and there is unused capacity (1,000 units), we will take into account only the incremental fixed costs.

To calculate the number of units to be sold, we can use the break-even point formula with the desired profit:

Break-even point in units= (fixed costs + desired profit) / contribution margin per unit

Break-even point in units= (650 + 1,150) / 2

Break-even point in units= 900 units

To earn $1,150 the order should be 900 units.