Genia Enterprises, Inc. has the capacity to produce 12,000 units per year. Expec

Question

Genia Enterprises, Inc. has the capacity to produce 12,000 units per year. Expected operations for the year are

Sales (10,000 units @ $20)

$200,000

Manufacturing costs:

   Variable

$8 per unit

   Fixed

$40,000

Marketing and administrative costs:

   Variable

$3 per unit

   Fixed

$20,000

REQUIRED:

a.

What is the expected level of operating profits?

b.

Should the company accept a special order for 1,000 units at a selling price of $15 if variable marketing expenses associated with this special order would be $2 per unit? Calculate the incremental profits if the order is accepted.

c.

Suppose the company received a special order for 3,000 units at a selling price of $15 with no variable marketing expenses. Calculate the impact on operating profits.

Sales (10,000 units @ $20)

$200,000

Manufacturing costs:

   Variable

$8 per unit

   Fixed

$40,000

Marketing and administrative costs:

   Variable

$3 per unit

   Fixed

$20,000

Explanation / Answer

a

Operating profit=Sales-Variable costs-Fixed costs=10000*(20-8-3)-40000-20000=$30000

b

Incremental profits=1000*(15-8-2)=$5000

Yes accept the order

c

Incremental profits =3000*(15-8)=$21000

Yes accept the order

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