Question

Marcy has received a special order for 2,700 units of its product at a special price of $96. The product normally sells for $110 and has the following manufacturing costs:

	Per unit
Direct materials		$	32
Direct labor			20
Variable manufacturing overhead			13
Fixed manufacturing overhead			7
Unit cost		$	72

Assume that Marcy has sufficient capacity to fill the order without harming normal production and sales and all fixed overhead is unavoidable.

a. If Marcy accepts the order, what effect will the order have on the company’s short-term profit?

b. What minimum price should Marcy charge to achieve a $83,700 incremental profit?

c. Now assume Marcy is currently operating at full capacity and cannot fill the order without harming normal production and sales. If Marcy accepts the order, what effect will the order have on the company’s short-term profit?

Answer 1

1
	Per unit	Total 2700 units
Incremental revenue	96	259200
Incremental costs:
Direct materials	32	86400
Direct labor	20	54000
Variable manufacturing overhead	13	35100
Total Incremental costs	65	175500
Incremental net operating income(loss)		83700
Profits will increase by $83700
2
When charged $96, the incremental profit is $83700
Minimum price = $96
3
Incremental net operating income(loss)	83700
Less: Lost contribution margin on sales	121500	=2700*(110-65)
Net Incremental net operating income(loss)	-37800
Profits will decrease by $37800