Question

Pericloud Company produces a product that has a regular selling price of $500 per unit. At a typical monthly production volume of 4,000 units, the product's average unit cost of goods sold amounts to $300. Included in this average is $150,000 of fixed manufacturing costs. All selling and administrative costs are fixed and amount to $40,000 per month. Pericloud Company has just received a special order for 2,000 units at $280 per unit. The buyer will pay for transportation, and the regular selling price will not be affected if Pericloud accepts the order. Assuming Pericloud Company has excess capacity, the effect on profits of accepting the order would be a:

Answer 1

Answer:

$35,000

Explanation:

The computation of effect on profits is shown below:-

Variable Manufacturing cost per unit    

Average cost                                        $300 per unit  

Less: Fixed Manufacturing cost            $37.5 per unit

$150,000 ÷ 4000 units

Variable Manufacturing cost             $262.5 per unit  

Price at Special Order                         $280 per unit    

Profit per Unit of Special order             $17.5

$280 - $262.50

Special order Units                       2,000 units  

Total Profit from Special Order             $35,000

2000 ×$ 17.50