Cuddly Toys makes a large teddy bear that currently sells for $62 per bear. At a

Question

Cuddly Toys makes a large teddy bear that currently sells for $62 per bear. At a production level of 20,000 bears per year, the bears have a total unit cost of $50 per bear. The total unit cost is comprised of variable costs of $45 per bear and fixed costs of $5 per bear (or total fixed costs of $100,000 ÷ 20,000 bears). Cuddly Toys has excess capacity to manufacture 15,000 more bears. The company has been approached by a new customer, who wants to buy 5,000 large bears for $47 apiece. What is the effect on operating profit if the special order is accepted? $10,000 increase to operating profit $10,000 decrease to operating profit $15,000 increase to operating profit $15,000 decrease to operating profit None of these.

Explanation / Answer

Effect on operating profit if the special order is accepted:

So answer is a) $10,000 increase to operating profit

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