Felter Company produced and sold 50,000 units of product and is operating at 70%
ID: 2485506 • Letter: F
Question
Felter Company produced and sold 50,000 units of product and is operating at 70% of plant capacity. Unit information about its product is as follows:
Sales price $70
Variable manufacturing cost $45
Fixed manufacturing cost ($500,000 ÷ 50,000) 10 55
Profit per unit $15
The company received a proposal from a foreign company to buy 10,000 units of Felter Company’s product for $50 per unit. This is a one-time only order and acceptance of this proposal will not affect the company’s regular sales. The president of Felter Company is reluctant to accept the proposal because he is concerned that the company will lose money on the special order.
Prepare a schedule reflecting an incremental analysis of this proposal and indicate the effect the acceptance of this order might have on the company’s income.
Explanation / Answer
SINCE THE FIRM HAS IDLE CAPACITY THEN IT CAN MANUFACTURE THESE ITEMS IF IT IS PROFITABLE. SO LET US CALCULATE THE PROFITABILITY WITH AND WITHOUT ACCEPTING THE PROPOSAL.
PROFITS WITHOUT ACCEPTANCE WILL BE
UNITS SOLD ( SALES PRICE - COST PRICE) = 50000 *( 70 - 55) = 50000 * 15 = $ 750,000
PROFIT AFTER ACCEPTANCE WILL BE
PROFIT FROM PROPOSAL WHICH WILL REQUIRE ONLY VARIABLE COSTS AND NO FIXED COST WILL BE INCURRED BECAUSE THE FIRM HAS ALREADY ACHIEVED ITS BREAK EVEN.
10000 ( OFFER PRICE PER UNIT - VARIABLE COST PER UNIT) = 10000 (50 - 45) = 10000 * 5 = 50000
ORIGINAL PROFIT + PROFIT FROM PROPOSAL = 750000 + 50000 = $ 800,000
THE PROPOSAL WILL RESULT IN ADDITIONAL PROFIT OF $50000. THE PROPOSAL SHOULD BE ACCEPTED.
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