Figure 9-7
Meco 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.
Meco 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 Meco accepts the order.
-Refer to Figure 9-7. Assuming Meco Company has excess capacity, the effect on profits of accepting the order would be
A)a £60,000 increase.
B)a £60,000 decrease.
C)a £30,000 increase.
D)a £30,000 decrease.
E)no change in profits.

Question

Quizplus · Accepted Answer

The total revenue from the special order would be 1,000 x £240 = £240,000. The total cost of fulfilling the special order would be: 
Cost of goods sold = 1,000 x £270 = £270,000 
Additional variable selling and administrative costs = £0 
Total cost = £270,000 
Therefore, the profit from fulfilling the special order would be: 
£240,000 - £270,000 = -£30,000 
However, since Meco Company has excess capacity and the regular selling price will not be affected, accepting the special order will not result in any additional fixed costs. Therefore, the special order will generate an incremental profit of: 
Revenue - Cost of goods sold = £240,000 - £270,000 = -£30,000 
Which means that accepting the special order will increase profits by £30,000 (i.e., the company will lose £30,000 less than if it had not accepted the order). Therefore, the best choice is C.

Figure 9-7 Meco Company Produces a Product That Has a Regular Selling