Ratzlaff Company has a current production level of 20,000 units per month.Unit costs at this level are:

Current monthly sales are 18,000 units.Jim Company has contacted Ratzlaff Company about purchasing 1,500 units at $2.00 each.Current sales would NOT be affected by the one-time-only special order,and variable marketing/distribution costs would NOT be incurred on the special order.What is Ratzlaff Company's change in operating profits if the special order is accepted?
A)$400 increase in operating profits
B)$400 decrease in operating profits
C)$1,800 increase in operating profits
D)$1,800 decrease in operating profits
E)$1,500 increase in operating profits

Question

Ratzlaff Company has a current production level of 20,000 units per month.Unit costs at this level are:

Current monthly sales are 18,000 units.Jim Company has contacted Ratzlaff Company about purchasing 1,500 units at $2.00 each.Current sales would NOT be affected by the one-time-only special order,and variable marketing/distribution costs would NOT be incurred on the special order.What is Ratzlaff Company's change in operating profits if the special order is accepted?
A)$400 increase in operating profits 
B)$400 decrease in operating profits 
C)$1,800 increase in operating profits 
D)$1,800 decrease in operating profits 
E)$1,500 increase in operating profits

Quizplus · Accepted Answer

To determine the change in operating profits, we need to calculate the incremental revenue and incremental costs associated with the special order.

Incremental revenue = Quantity of units in special order * Price per unit = 1,500 * $2 = $3,000

Incremental cost = Variable cost per unit * Quantity of units in special order = $11 * 1,500 = $16,500

Since the special order does not incur any variable marketing/distribution costs and does not affect current sales, we do not need to consider those costs.

Therefore, the change in operating profits = Incremental revenue - Incremental cost = $3,000 - $16,500 = -$13,500

This indicates a decrease in operating profits. However, this calculation assumes that the fixed costs will remain the same, which may not be true. If the special order allows Ratzlaff Company to utilize idle capacity or undertake the order without incurring any additional fixed costs, then the change in operating profits could be positive.

Ratzlaff Company Has a Current Production Level of 20,000 Units