Figure 9-3
Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for £30. Manufacturing and other costs are as follows: $\begin{array}{lllr}
\text { Variable costs per unit: } && {\text { Fixed costs per month: }} \
\text { Direct materials } & £ 9.00 & \text { Factory overhead } & £ 120,000 \
\text { Direct labour } & 4.50 & \text { Selling and admin. } & 60,000 \
\text { Factory overhead } & 3.00 & \text { Total } & \underline{E 180,000} \
\text { Distribution } &1.50 & & \
\text { Total } &£18.00 & &
\end{array}$ 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.
-Refer to Figure 9-3. 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?

Question

Quizplus · Accepted Answer

The special order's effect on profits can be calculated by considering the additional revenue and the additional costs (both variable and fixed) associated with the order. The additional revenue from the special order is 7,000 units at £25.20 each, totaling £176,400. The variable costs per unit are £18.00, so for 7,000 units, the total variable costs are £126,000. The additional fixed selling and administrative costs are £6,000. Therefore, the net effect on profit is the additional revenue (£176,400) minus the total additional costs (£126,000 + £6,000 = £132,000), which equals £44,400. However, since the capacity is 25,000 units and the current production is 20,000 units, accepting the special order would not require sacrificing any regular sales because the company has the capacity to produce the additional units. Thus, the correct calculation for the effect on profits should consider only the incremental revenue and costs directly associated with the special order. The mistake in the calculation provided in the explanation indicates a misunderstanding of the correct answer, which should reflect the incremental profit from accepting the special order without affecting the existing production and sales.

Figure 9-3 Miller Company Produces Speakers for Home Stereo Units

Figure 9-3
Miller Company Produces Speakers for Home Stereo Units