Question

Gandolph Company manufactures a product with the following costs per unit at the expected production of...

Gandolph Company manufactures a product with the following costs per unit at the expected production of 30,000 units:

Direct materials $ 4
Direct labor 12
Variable manufacturing overhead 6
Fixed manufacturing overhead 8


The company has the capacity to produce 40,000 units. The product regularly sells for $40. A wholesaler has offered to pay $32 a unit for 2,000 units.

If the firm is at capacity and the special order is accepted, the effect on operating income would be

a. $0.

b. a $20,000 increase.

c. a $16,000 decrease.

d. a $4,000 increase.

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Answer #2

OPTION C-----$16000 DECREASE

If firm is at its capacity yet it accepts special order of 2000 units then firm needs to cut down it's original production by 2000 units and produce special order production of 2000 units

Profit on original units = SP - all costs = 40 - 30 =$10 per unit

Profit on special order units = 32 -30 =$2 per unit

Therefore,

Loss of profit on actual 2000 units = 2000 *10 =20000

Less :- profit on special order units = 2000*2 = 4000

Net loss of profit = 16000

answered by: anonymous
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