Potter has received a special order for 10,000 units of its product at a special price of $24.The product normally sells for $32 and has the following manufacturing costs: Potter is currently operating at full capacity and cannot fill the order without harming normal production and sales.If Potter accepts the order,what effect will the order have on the company's short-term profit?

A)$64,000 decrease
B)$64,000 increase
C)$80,000 decrease
D)$16,000 increase

Question

Potter has received a special order for 10,000 units of its product at a special price of $24.The product normally sells for $32 and has the following manufacturing costs: Potter is currently operating at full capacity and cannot fill the order without harming normal production and sales.If Potter accepts the order,what effect will the order have on the company's short-term profit?

A)$64,000 decrease 
B)$64,000 increase 
C)$80,000 decrease 
D)$16,000 increase

Quizplus · Accepted Answer

To determine the effect on short-term profit, the following calculations can be made:

Normal selling price per unit = $32
Special price per unit = $24
Difference in price per unit = $32 - $24 = $8

Total revenue from the order = 10,000 x $24 = $240,000
Total revenue at normal selling price = 10,000 x $32 = $320,000
Revenue loss = $320,000 - $240,000 = $80,000

Manufacturing cost per unit = $20
Total manufacturing cost for 10,000 units = 10,000 x $20 = $200,000

Profit at normal selling price = $320,000 - $200,000 = $120,000
Profit from the special order = $240,000 - $200,000 = $40,000
Total profit = $120,000 + $40,000 = $160,000

Therefore, accepting the special order would result in a decrease in short-term profit of $80,000. The answer is C.

Potter Has Received a Special Order for 10,000 Units of Its