Yosemite Company produces Blu-Ray Players for home stereo units. The Blu-Ray 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.
An Atlanta wholesaler has proposed to place a special one-time order for 7,000 units at a special price of $25.20 per unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and administrative costs of $6,000. In addition, assume that overtime production is not possible and that 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 $30,900
B)increase of $54,900
C)increase of $36,900
D)increase of $176,400

Question

Yosemite Company produces Blu-Ray Players for home stereo units. The Blu-Ray 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.
An Atlanta wholesaler has proposed to place a special one-time order for 7,000 units at a special price of $25.20 per unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and administrative costs of $6,000. In addition, assume that overtime production is not possible and that 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 $30,900
B)increase of $54,900
C)increase of $36,900
D)increase of $176,400

Quizplus · Accepted Answer

The correct answer is A. The special order will increase profits by $30,900.The contribution margin per unit is $30 - $18 = $12. The special order will generate $7,000 * $12 = $84,000 in contribution margin. The additional fixed selling and administrative costs are $6,000. Therefore, the net effect on profits is $84,000 - $6,000 = $78,000. However, the special order will also reduce the number of units that can be sold to regular customers by 7,000 units. The contribution margin per unit for regular customers is also $12. Therefore, the special order will reduce profits by $7,000 * $12 = $84,000. The net effect on profits is $78,000 - $84,000 = $30,900.

Yosemite Company Produces Blu-Ray Players for Home Stereo Units The Variable Distribution Costs Are for Transportation to the Retail