Potlatch company manufactures sonars for fishing boats. Model 100 sells for $200

Question

Potlatch company manufactures sonars for fishing boats. Model 100 sells for $200. Potlatch produces and sells 5,000 of them per year. Cost data are as follows:

Variable manufacturing $105 per unit
Variable marketing $5.00 per unit
Fixed manufacturing $270,000 per year
Fixed marketing & admin $140,00 per year

A potential deal has come up for a one time sale of 25 units at a special price of $105 per unit. The marketing manager says that the sale will not negatively impact the company's regular sales activities, but will require the normal amount of variable market costs. The production manager says that there's plenty of excess capacity and the deal will not impact fixed costs in any way. The controller points out, however, that because the incremental revenues are just equal to the incremental costs to fill the order, the deal will not have any impact on the bottom line whatever. The controller is correct in his statement?

Explanation / Answer

Current Cont Margin pu = Sale price pu - Var cost pu = 200-(105+5) = 90 So for 5000 boats, Total cont = 5000*$90 = $450,000 Less FC (270,000+140,000) = ($410,000) ----------------------------------------------------- Total Profit $40,000 SPl Order Sale price is $105 Var cost for Spl order = $105+$5 = $110 So Spl order will have a negative cont per boat of ($5) So for 25 units, Loss will be 25*($5) = ($125) As there is a net Loss of $125 on SPl order, Controller is not correct in his Stt.

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