The Parton Company has gathered the following information for a unit of its more

Question

The Parton Company has gathered the following information for a unit of its more popular product:

Direct materials: $40 Direct labor: $30 Overhead (60% variable): $40 Cost to manufacture: $110

The above cost information is based on 20,000 units. Parton currently sells 17,000 units for $124 per unit. A distributor has offered to buy 2,000 units for $ 100 per unit. This speical order would not disturb regular sales.

a. Calculate Parton's change in operating profits if the special order is accepted.

b. How many units of regular sales could be lost before this contract is not profitable?

Explanation / Answer

a Incremental revenue 200000 =2000*100 Incremental costs: Direct materials 80000 =2000*40 Direct labor 60000 =2000*30 Overhead 48000 =2000*40*60% Total Incremental costs 188000 Change in operating profits 12000 b Contribution margin per unit on regular sales = 124-40-30-24= $30 Contribution margin per unit on special order = 100-40-30-24= $6 Units of regular sales that can be lost = 12000/(30-6)= 500

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