Walnut has received a special order for 2,000 units of its product at a special price of $270.The product normally sells for $360 and has the following manufacturing costs: Walnut is currently operating at full capacity and cannot fill the order without harming normal production and sales.If Walnut accepts the order,what effect will the order have on the company's short-term profit?
A)$108,000 decrease
B)$108,000 increase
C)$180,000 decrease
D)zero

Question

Walnut has received a special order for 2,000 units of its product at a special price of $270.The product normally sells for $360 and has the following manufacturing costs:  Walnut is currently operating at full capacity and cannot fill the order without harming normal production and sales.If Walnut accepts the order,what effect will the order have on the company's short-term profit?
A)$108,000 decrease 
B)$108,000 increase 
C)$180,000 decrease 
D)zero

Quizplus · Accepted Answer

To fulfill the special order, Walnut will incur additional costs of $50 per unit ($90-$40), which will reduce the potential profit of each unit sold. The total cost of manufacturing 2,000 units would be 2,000 x $140=$280,000. However, the order is for a special price of $270, so Walnut would only receive $540,000 ($270 x 2,000). Therefore, the short-term profit would be $540,000 - $280,000 = $260,000. 
If the order had not been accepted, the company would have earned $720,000 (2,000 x $360) from sales at the normal price, resulting in a profit of $580,000. 
Therefore, accepting the order would result in a decrease in short-term profit of $580,000 - $260,000 = $320,000.

Walnut Has Received a Special Order for 2,000 Units of Its