Rose Manufacturing Company had the following unit costs: A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Assuming that sufficient unused production capacity exists to produce the order and no regular customers will be affected by the order, how much additional profit or loss will be generated by accepting the special order?
A) $12,000 profit
B) $96,000 profit
C) $84,000 loss
D) $24,000 loss

Question

Rose Manufacturing Company had the following unit costs:  A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Assuming that sufficient unused production capacity exists to produce the order and no regular customers will be affected by the order, how much additional profit or loss will be generated by accepting the special order?
A) $12,000 profit 
B) $96,000 profit 
C) $84,000 loss 
D) $24,000 loss

Quizplus · Accepted Answer

- The regular selling price is $60 per unit, and the special price offered is $48 per unit, which means a $12 decrease in the selling price.
- The special order requires the production of 2,000 units, which represents additional sales revenue of 2,000 x $48 = $96,000.
- The additional costs that will be incurred to produce the special order are the variable costs per unit, which amount to $22 per unit ($8 + $6 + $1 + $7). Therefore, the total additional production costs for the special order will be 2,000 x $22 = $44,000.
- The contribution margin per unit is the selling price per unit minus the variable cost per unit, which equals $48 - $22 = $26 per unit. This means that for each unit sold, $26 contributes to covering fixed costs and generating profit.
- To determine whether accepting the special order will generate additional profit or loss, we need to compare the contribution margin for the special order to the fixed cost that will be incurred to produce it. If the contribution margin exceeds the fixed cost, then accepting the order will generate additional profit. If the fixed cost exceeds the contribution margin, then accepting the order will generate additional loss.
- The fixed costs that will be incurred to produce the special order are not given in the problem, but we can assume that they will be the same as the fixed costs associated with producing the regular output. In other words, the special order will not generate any additional fixed cost.
- The total contribution margin for the special order will be 2,000 x $26 = $52,000. Since there are no additional fixed costs associated with the special order, this amount represents additional profit generated by accepting the order.
- Therefore, the answer is A) $12,000 profit, which is equal to the difference between the additional revenue generated by the special order ($96,000) and the additional production costs incurred ($44,000), minus the opportunity cost of losing $26 of contribution margin per unit ($26 x 2,000 units = $52,000) on regular sales.

Rose Manufacturing Company Had the Following Unit Costs: a One-Time