Question

Harcourt Manufacturing (HM) has the capacity to produce 10,700 fax machines per year. HM currently produces and sells 7,700 units per year. The fax machines normally sell for $170 each. Modem Products has offered to buy 2,700 fax machines from HM for $95 each. Unit-level costs associated with manufacturing the fax machines are $29 each for direct labor and $54 each for direct materials. Product-level and facility-level costs are $57,000 and $72,000, respectively. How much would profit increase (decrease) if HM accepted this special order?

Answer 1

Revenue from special order	256,500	(2700*95)
Less: Cost associated with order
Less; Direct material	145,800
Less: Direct labour	78,300
Income from special order	32,400
Increase in profit of $32000
Note : Product level cost and facility level cost does not affected by the special order hence ignored.