Question

Exercise D8-5 Swifty Manufacturing has an annual capacity of 80,600 units per year. Currently, the company is making and selling 78,600 units a year. The normal sales price is $102 per unit, variable costs are $65 per unit, and total fixed expenses are $2,000,000. An out-of-state distributor has offered to buy 5,100 units at $70 per unit. Swifty's cost structure should not change as a result of this special order. By how much will Swifty's income change if the company accepts this order? Swifty’ net income will by $ if it accepts the special order.

Answer 1

Solution:

Selling price per unit of regular sales = $102 per unit

Selling price per unit of special order = $70 per unit

Variable cost per unit = $65

Contribution margin per unit of regular sale = $102 - $65 = $37

Contribution margin per unit for special order = $70 - $65 = $5

Annual capacity = 80600 units

Existing sales = 78600 units

Additional capacity available = 80600 - 78600 = 2000 units

Special order quantity = 5100 units

Accepting special order will result in sales of regular order quantity = 5100 - 2000 = 3100

Contribution from special order = 5100 * $5 = $25,500

Loss of contribution margin on regular sale if special order is accepted = 3100 * $37 = $114,700

Change in come if Swifty accept the special order = $25,500 - $114,700 = ($89,200)

Hence swifty income will decrease by $89,200 if it accepts the special order.