Modesto Company produces CD Players for home stereo units. The CD Players are sold to retail stores for $30. Manufacturing and other costs are as follows: $$\begin{array} { l r l r }
\text { Variable costs per unit: } & & { \text { Fixed costs per month: } } \
\text { Direct materials } & \$ 9.00 & \text { Factory overhead } & \$ 120,000 \
\text { Direct labor } & 4.50 & \text { Selling and admin. } & 60,000 \
\text { Factory overhead } & 3.00 & \text { Total } & \$ 180,000 \
\text { Distribution } & 1.50 & & \
\text { Total } & \$ 18.00 & &
\end{array}$$ The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year.
A San Diego wholesaler has proposed to place a special one-time order of 10,000 units at a reduced price of $24 per unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and administrative costs of $3,000. All other information remains the same as the original data. What is the effect on profits if the special order is accepted?
A)increase of $12,000
B)increase of $57,000
C)increase of $75,000
D)decrease of $168,000

Question

Modesto Company produces CD Players for home stereo units. The CD Players are sold to retail stores for $30. Manufacturing and other costs are as follows: $$\begin{array} { l r l r } 
\text { Variable costs per unit: } & & { \text { Fixed costs per month: } } \
\text { Direct materials } & \$ 9.00 & \text { Factory overhead } & \$ 120,000 \
\text { Direct labor } & 4.50 & \text { Selling and admin. } & 60,000 \
\text { Factory overhead } & 3.00 & \text { Total } & \$ 180,000 \
\text { Distribution } & 1.50 & & \
\text { Total } & \$ 18.00 & &
\end{array}$$ The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year.
A San Diego wholesaler has proposed to place a special one-time order of 10,000 units at a reduced price of $24 per unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and administrative costs of $3,000. All other information remains the same as the original data. What is the effect on profits if the special order is accepted?
A)increase of $12,000
B)increase of $57,000
C)increase of $75,000
D)decrease of $168,000

Quizplus · Accepted Answer

The special order will increase profits by $12,000. The variable costs per unit are $18.00, and the selling price is $24.00. Therefore, the contribution margin per unit is $6.00. The special order is for 10,000 units, so the total contribution margin from the special order is $60,000. The additional fixed selling and administrative costs are $3,000. Therefore, the net increase in profits from the special order is $60,000 - $3,000 = $57,000.

Modesto Company Produces CD Players for Home Stereo Units The Variable Distribution Costs Are for Transportation to the Retail