Noreaster 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.
Noreaster 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 Noreaster accepts the order.
Assuming Noreaster Company has excess capacity, the effect on profits of accepting the order would be a
A)$30,000 increase.
B)$30,000 decrease
C)$60,000 increase.
D)$60,000 decrease..

Question

Quizplus · Accepted Answer

The profit increase from the special order can be calculated by subtracting the variable costs from the special order revenue. The variable cost per unit is $270 - $120,000 / 2,000 units = $150. For 1,000 units, the variable costs are $150,000. The revenue from the special order is 1,000 units * $240 = $240,000. The profit increase is $240,000 - $150,000 = $90,000. However, since the question asks about the effect on profits, and we need to consider the fixed costs which are already covered in the regular operations, the additional profit comes from the difference between the special order revenue and the variable costs alone. The fixed costs do not change with the order, so they are not directly relevant to the incremental profit calculation. The calculation provided was incorrect in the explanation; the correct approach to find the incremental profit is to subtract the incremental costs from the incremental revenue directly. Incremental revenue is $240,000 (1,000 units * $240/unit). Incremental costs are the variable costs, which are $150 per unit for 1,000 units, totaling $150,000. Thus, the incremental profit is $240,000 - $150,000 = $90,000. This was a mistake in the explanation process. The correct calculation for the effect on profits should directly compare the additional revenue from the special order to the additional variable costs incurred by the order. Fixed costs are not affected by the decision since they remain constant regardless of the order.

Noreaster Company Produces a Product That Has a Regular Selling