Question

The MNK Company has gathered the following information for a unit of its most popular product:

Direct materials $ 14

Direct labor 7

Overhead (40% variable) 15

Cost of manufacture 36

Desired markup (50%) 18

Target selling price 54

The above cost information is based on 10,700 units. A foreign distributor has offered to buy 2,700 units at a price of $40 per unit. This special order would not disturb regular sales. Variable shipping and other selling expenses would be an additional $1.20 per unit for the special order. If the special order is accepted, MNK's operating profits will increase by:

Answer 1

Direct Material	$14
Direct Labor	$7
Variable Overhead ( 15*40/100)+1.20	$7.20
Cost to manufacture	$28.20
Selling Price = $ 24 per Unit
Cost to manufacture = $ 40 per unit
Hence, Profits =Selling Price - Cost to Manufacture
$ 11.8 per unit
Total Units = 2,700
Hence total Profits = 2,700*11.8
31860
Since the special order would not disturb regular sales, hence If the special order is accepted, Minton's operating profits will increase by $ 31860
Note: The Overheads is $15 per unit
Out of this 40% is variable i.e. $6 is variable cost
Fixed Overhead is $ 9 which will be incurred irrespective of whether or not the special order is accepted. Hence, it is not taken into consideration for calculation of additional profits.