2,250 units. 625 units. 300 units. 4,500 units. 1,125 units. Minor Electric has

Question

2,250 units.

625 units.

300 units.

4,500 units.

1,125 units.

Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per unit. Minor currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. If Minor wishes to earn $1,250 on the special order, the size of the order would need to be:

Explanation / Answer

The number of units to be sold to earn a desired profit of $1,250 should be computed by dividing the sum of fixed costs for the special order and the desired profit by contribution margin per unit from the special order.

Selling price per unit for special order = $5

Variable costs per unit = $3

Therefore,

Contribution margin per unt from the special order = $5 - $3 = $2

Fixed costs (cost of new machine) = $1,000

Desired profit = $1,250

Number of units to be sold to earn $1,250 from special order = ($1,000 + $1,250) / $2 = 1,125 units

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