Question

ABC Company. has the capacity to produce 15,000 lamps each month. Current
regular production and sales are 12,000 lamps at a selling price of $15
each. The costs of producing each lamp is:

direct materials         $5.00                          
direct labor              3.00                          
variable overhead         1.00
fixed overhead            1.25
variable selling costs    0.50
fixed selling costs       0.75

ABC Company has received a special order who wants to purchase 6,000 lamps
at a reduced price of $13 per lamp. ABC Company has determined that there
would be no selling expenses in connection with this special order. 

Calculate the increase in company profits if ABC Company accepts the
special order.

Answer 1

Financial Advantage of Accepting the order

If the special order for 6,000 Unit is accepted, then the annual profits would Increase by $21,000

Particulars	Per Unit	6,000 Units
Incremental sales	$13.00	$78,000
Incremental costs,
Direct materials	$5.00	$30,000
Direct labor	$3.00	$18,000
Variable manufacturing overhead	$1.00	$6,000
Variable selling and administrative	$0.50	$3,000
Total incremental costs	$9.50	$57,000
Incremental profits	$3.50	$21,000