Pericloud Company produces a product that has a regular selling price of $500 per unit.At a typical monthly production volume of 4,000 units, the product's average unit cost of goods sold amounts to $300.Included in this average is $150,000 of fixed manufacturing costs.All selling and administrative costs are fixed and amount to $40,000 per month.
Pericloud Company has just received a special order for 2,000 units at $280 per unit.The buyer will pay for transportation, and the regular selling price will not be affected if Pericloud accepts the order.

Assuming Pericloud Company has excess capacity, the effect on profits of accepting the order would be a:
A) $72,000 increase.
B) $72,000 decrease.
C) $35,000 increase.
D) $35,000 decrease.

Question

Pericloud Company produces a product that has a regular selling price of $500 per unit.At a typical monthly production volume of 4,000 units, the product's average unit cost of goods sold amounts to $300.Included in this average is $150,000 of fixed manufacturing costs.All selling and administrative costs are fixed and amount to $40,000 per month.  
Pericloud Company has just received a special order for 2,000 units at $280 per unit.The buyer will pay for transportation, and the regular selling price will not be affected if Pericloud accepts the order.
 
Assuming Pericloud Company has excess capacity, the effect on profits of accepting the order would be a: 
A) $72,000 increase.
B) $72,000 decrease.
C) $35,000 increase.
D) $35,000 decrease.

Quizplus · Accepted Answer

Increase in profit = Number of units sold × [Selling price per unit - (Cost per unit - (Fixed cost ÷ Production volume))] = 2,000 units × [$280 - ($300 - $150,000 / 4,000 units)] = $35,000 increase

Pericloud Company Produces a Product That Has a Regular Selling