Cranberry has received a special order for 100 units of its product at a special price of $2,100. The product normally sells for $2,800 and has the following manufacturing costs: Assume that Cranberry has sufficient capacity to fill the order without harming normal production and sales. If Cranberry accepts the order, what effect will the order have on the company's short-term profit?
A) $42,000 decrease
B) $42,000 increase
C) $70,000 decrease
D) $28,000 increase

Question

Cranberry has received a special order for 100 units of its product at a special price of $2,100. The product normally sells for $2,800 and has the following manufacturing costs:  Assume that Cranberry has sufficient capacity to fill the order without harming normal production and sales. If Cranberry accepts the order, what effect will the order have on the company's short-term profit?
A) $42,000 decrease 
B) $42,000 increase 
C) $70,000 decrease 
D) $28,000 increase

Quizplus · Accepted Answer

The total cost per unit is $1,750 ($1,050 + $700). Therefore, if Cranberry sells 100 units at the special price of $2,100, the revenue will be $210,000 ($2,100 x 100) and the total cost will be $175,000 ($1,750 x 100). This leaves a gross profit of $35,000 ($210,000 - $175,000). 
If Cranberry did not accept the special order, the revenue would be $280,000 ($2,800 x 100) and the total cost would be $175,000 ($1,750 x 100), leaving a gross profit of $105,000 ($280,000 - $175,000). 
Therefore, by accepting the special order, the company's short-term profit will increase by $28,000 ($35,000 - $7,000), which is the contribution margin of the special order.

Cranberry Has Received a Special Order for 100 Units of Its