Meco Company produces a product that has a regular selling price of $360 per unit.At a typical monthly production volume of 2,000 units, the product's average unit cost of goods sold amounts to $270.Included in this average is $120,000 of fixed manufacturing costs.All selling and administrative costs are fixed and amount to $30,000 per month. Meco Company has just received a special order for 1,000 units at $240 per unit.The buyer will pay transportation, and the regular selling price will not be affected if Meco accepts the order.
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Assuming Meco Company has excess capacity, the effect on profits of accepting the order would be a
A) $60,000 increase.
B) $60,000 decrease.
C) $30,000 increase.
D) $30,000 decrease.

Question

Quizplus · Accepted Answer

Since Meco Company has excess capacity, accepting the special order of 1,000 units will not affect their regular selling price of $360 per unit. The special order will generate additional revenue of $240,000 ($240 x 1,000 units). The cost of goods sold for the special order will be lower than the average unit cost of $270 due to the additional revenue not being affected by fixed manufacturing costs. Assuming the variable cost of goods sold is $210 ($270 - $120 fixed costs), the special order will have a total cost of $210,000 ($210 x 1,000 units). Therefore, the profit from the special order will be $30,000 ($240,000 - $210,000). Accepting the special order will result in a $30,000 increase in profits ($30,000 - $0).

Meco Company Produces a Product That Has a Regular Selling