The Young Company has gathered the following information for a unit of its most popular product:
$$\begin{array} { l r }
\text { Direct materials } & \$ 12 \
\text { Direct labor } & 6 \
\text { Overhead (40\% variable) } &\underline{ 10} \
\text { Cost to marnufacture } & 28 \
\text { Desired markup (50\%) } &\underline{ 14} \
\text { Target selling price } &\underline{ \$ 42 }\

\end{array}$$
The above cost information is based on 10,000 units. A distributor has offered to buy 2,000 units at a price of $32 per unit.
- The distributor claims this special order would not disturb regular sales at $42. Special packaging and other selling expenses would be an additional $0.50 per unit for the special order. How many units of regular sales could be lost before this contract is not profitable?
A) 0 units
B) 950 units
C) 1,000 units
D) 2,000 units

Question

The Young Company has gathered the following information for a unit of its most popular product:
$$\begin{array} { l r } 
\text { Direct materials } & \$ 12 \
\text { Direct labor } & 6 \
\text { Overhead (40\% variable) } &\underline{  10} \
 \text { Cost to marnufacture } & 28 \
\text { Desired markup (50\%) } &\underline{  14} \
 \text { Target selling price } &\underline{  \$ 42 }\

\end{array}$$
The above cost information is based on 10,000 units. A distributor has offered to buy 2,000 units at a price of $32 per unit.
- The distributor claims this special order would not disturb regular sales at $42. Special packaging and other selling expenses would be an additional $0.50 per unit for the special order. How many units of regular sales could be lost before this contract is not profitable?
A) 0 units
B) 950 units
C) 1,000 units
D) 2,000 units

Quizplus · Accepted Answer

The contribution margin per unit for the special order is $42 - $28.50 = $13.50. The additional selling expenses are $0.50 per unit. So, the net contribution margin per unit for the special order is $13.50 - $0.50 = $13.00. The company can afford to lose up to 1,000 units of regular sales before this contract is not profitable. This is because the contribution margin from the 1,000 units of lost regular sales would be $13.00 per unit * 1,000 units = $13,000. This would offset the $13,000 in lost contribution margin from the special order.

The Young Company Has Gathered the Following Information for a Unit