Pamela in Bamplona makes bull-repellent scent according to a traditional Spanish recipe,which normally sells at €9 (Euros)per unit.Normal production volume is 10,000 ounces per month.Average cost is €5 per ounce,of which €2 is direct material and €1 is variable conversion cost.This product is seasonal.After July,demand for this product drops to 6,000 ounces monthly.In November,Umberto offers to buy 1,800 ounces for €8,100. If Pamela accepts the order,she must design a special label for Umberto at a cost of €800.Each label will cost 30 cents to make and apply.Pamela should:

Question

Quizplus · Accepted Answer

First, let's calculate the cost per unit:
Direct material cost = €2
Variable conversion cost = €1
Total cost = €3

Since Pamela sells the product for €9, her profit per unit is €6. Her total profit for the 10,000 ounces per month is €60,000.

If Pamela accepts Umberto's order of 1,800 ounces, her profit will be:

Revenue = €8,100
Cost of goods sold = 1,800 ounces x €3 per ounce = €5,400
Label cost = €800 + 1,800 labels x €0.30 per label = €1,240
Total cost = €5,400 + €1,240 = €6,640
Profit = €8,100 - €6,640 = €1,460

Therefore, Pamela should accept the order, as it would increase her profit by €1,460.

Pamela in Bamplona Makes Bull-Repellent Scent According to a Traditional