Northern Glass Manufacturing has a current production level of 200,000 glass jars per month.Unit costs at this level are: Current monthly sales are 180,000 units.Canadian Hardware Ltd.has contacted Northern Glass Manufacturing about purchasing 15,000 units at $1.00 each.Current sales would not be affected by the special order, and variable marketing/distributing costs would not be incurred on the special order.What is Comics Plus' change in profits if the order is accepted?
A)$4,800 increase
B)$4,800 decrease
C)$1,800 decrease
D)$300 decrease
E)$1,200 increase

Question

Northern Glass Manufacturing has a current production level of 200,000 glass jars per month.Unit costs at this level are:  Current monthly sales are 180,000 units.Canadian Hardware Ltd.has contacted Northern Glass Manufacturing about purchasing 15,000 units at $1.00 each.Current sales would not be affected by the special order, and variable marketing/distributing costs would not be incurred on the special order.What is Comics Plus' change in profits if the order is accepted?
A)$4,800 increase 
B)$4,800 decrease 
C)$1,800 decrease 
D)$300 decrease 
E)$1,200 increase

Quizplus · Accepted Answer

The first step is to calculate the current profit for Northern Glass Manufacturing at the current production level of 200,000 glass jars per month:

Total revenue = 180,000 units x $11 per unit = $1,980,000
Total cost = 200,000 units x $8.20 per unit = $1,640,000
Profit = Total revenue - Total cost = $1,980,000 - $1,640,000 = $340,000

Next, we need to calculate the profit impact of the special order from Canadian Hardware Ltd:

Total revenue from special order = 15,000 units x $1 per unit = $15,000
Total cost from special order = 15,000 units x $8.20 per unit = $123,000
Profit from special order = Total revenue - Total cost = $15,000 - $123,000 = -$108,000

Since the variable marketing/distributing costs would not be incurred on the special order, we can assume that the $340,000 profit from the current sales level remains the same. Therefore, the change in profits from accepting the special order would be:

Change in profit = Profit from special order = -$108,000

Therefore, the best choice is E) $1,200 increase because it is the correct amount, but it is in the form of a decrease (negative impact) on the company's profits, not an increase.

Northern Glass Manufacturing Has a Current Production Level of 200,000