Normal Company budgeted the sale of 400,000 calculators at $40 per unit for the

Question

Normal Company budgeted the sale of 400,000 calculators at $40 per unit for the years. Variable manufacturing costs were budgeted at $16 per unit, and fixed manufacturing costs at $10 per unit. A special order offering to buy 40,000 calculators for $18 each was received by Normal in March. Normal has sufficient plant capacity to manufacture the additional quantity; however, the production would have to be done on an overtime basis at an estimated additional cost of $3 per calculator. Acceptance of the special order would not affect Normal's normal sales an no selling expenses would be incurred. What would the effect on operating profit if the special order was accepted?
a.$40,000 decrease b.$80,000 decrease c.$120,000 decrease d.$80,000 increase

please show work.

Explanation / Answer

a. Wout Special Order Cont per calculator = Sale price pu - VC pu = $40-$16 = $24 SO Total Cont for 400,000 calci = 400,000*$24 = $9600,000 Less Fixed cost = 400,000*$10 = $4000,000 ------------------------------------------------------ Opearting profit = $5600,000.................................(1) b. With Spl Order Total Cont for 400,000 calci will remanin same as in 'a' above = $9600,000 COnt per claci for Spl order = New Sale price pu - New VC pu = $18 - (16+3) = -$1 So for 40,000 Calci, Total Cont = 40,000*$-1 = -$40,000 ie a Loss.......(2) As Fixed costs will not change with addl volume & they are being recovered in 400,000 unist, Net Operating Loss on SPl order is -$40,000 SO Ans is a.$40,000 decrease

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