Falcon Co. produces a single product. Its normal selling price is $30.00 per unit. The variable costs are $19.00 per unit. Fixed costs are $25,000 for a normal production run of 5,000 units per month. Falcon received a request for a special order that would not interfere with normal sales. The order was for 1,500 units with a special price of $20.00 per unit. Falcon has the capacity to handle the special order, and for this order, a variable selling cost of $1.00 per unit would be eliminated. If the order is accepted, the differential effect on profit would be a(n)
A)decrease of $750
B)decrease of $4,500
C)increase of $3,000
D)increase of $1,500

Question

Quizplus · Accepted Answer

The differential effect on profit is calculated by considering the additional revenue and costs associated with the special order. The revenue from the special order is 1,500 units x $20 = $30,000. The variable cost per unit is $19, but the $1 selling cost is eliminated, so the cost per unit is $18. The total variable cost for the order is 1,500 units x $18 = $27,000. The increase in profit is $30,000 - $27,000 = $3,000.

Falcon Co Produces a Single Product