Fulton Company has a maximum capacity level of 65,000 unter per month. Each unit

Question

Fulton Company has a maximum capacity level of 65,000 unter per month. Each unit regularly sells for $7.00 Unit costs are:
Direct Materials: $.55
D. Labor: $.80
V. Overhead: $.20
F. Overhead: $.25
Marketing -Fixed: $.35
Marketing - Variable: $.35

Current monthly sales are 65,000 units. Cherokee Company has contact Fulton Company about purchasing 7,000 units at $4.50 each. The special order would require $1 per unit for shipping. Fulton is now selling 65,000 units through regular channels each period, which require $.40 per unit for shipping. Marketing costs would not be incurred on the special order. What is Fulton's Company's change in operating profits if the special order is accepted?

Explanation / Answer

Operating profit Normal Amount in$ Amount in$ Sales        ( 65000*$7.00) 455000 Less: variable cost Direct material (65000*$0.55) 35750 Direct labour (65000*$0.80) 52000 variable over head (65000*$0.20) 13000 variable marketing Expenses (65000*$0.35) 22750 Shipping Costs (65000*$0.40) 26000 149500 Contribution 305500 less: Fixed costs Fixed over head 65000*$0.25 16250 Fixed marketing Expenses (65000*$0.35) 22750 39000 Operating profit 266500 Operating profit if the special order Accepted (7000 units at $4.5 per unit Amount in$ Amount in$ Normal Sales        ( 65000-7000)*$7.00 406000 Special order   (7000*$4.50) 31500 total Sales 437500 Less: variable cost Direct material (65000*$0.55) 35750 Direct labour (65000*$0.80) 52000 variable over head (65000*$0.20) 13000 variable marketing Expenses (65000*$0.35) 22750 Shipping Costs (65000-7000)*$0.40 23200 Shipping for Special order 7000*$1 146700 Contribution 290800 less: Fixed costs Fixed over head 65000*$0.25 16250 Fixed marketing Expenses (65000*$0.35) 22750 39000 Operating profit 251800 Reduction in operating profit ($266500-$251800) 14700 if the sepcial order is accepted then the operating profits of Fulton company is reduced by $14700

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