Lattimer Company had the following results of operations for the past year: A foreign company whose sales will not affect Lattimer's market offers to buy 5,000 units at $7.50 per unit.In addition to existing costs,selling these units would add a $0.25 selling cost for export fees.If Lattimer accepts this additional business,the special order will yield a:
A)$2,000 loss.
B)$8,250 loss.
C)$3,750 profit.
D)$3,250 loss.
E)$5,000 profit.

Question

Lattimer Company had the following results of operations for the past year:  A foreign company whose sales will not affect Lattimer's market offers to buy 5,000 units at $7.50 per unit.In addition to existing costs,selling these units would add a $0.25 selling cost for export fees.If Lattimer accepts this additional business,the special order will yield a:
A)$2,000 loss. 
B)$8,250 loss. 
C)$3,750 profit. 
D)$3,250 loss. 
E)$5,000 profit.

Quizplus · Accepted Answer

To calculate the impact of the special order on Lattimer's profitability, we need to calculate the contribution margin per unit, which is the difference between the selling price and variable cost per unit:

Contribution margin per unit = Selling price per unit - Variable cost per unit
= $10 - $7
= $3

Then, we need to add the additional cost per unit for the special order, which is $0.25:

Contribution margin per unit for the special order = Selling price per unit - Variable cost per unit - Additional cost per unit
= $7.50 - $7 - $0.25
= $0.25

Therefore, the special order will yield a contribution margin of $0.25 per unit. Multiplying this by the number of units in the order (5,000 units) gives us a total contribution margin of $1,250.

Since the order is expected to generate additional revenue of $37,500 ($7.50 x 5,000 units), we can subtract the total variable costs (including the $0.25 additional cost) to get the total profit:

Total profit from the special order = Total revenue - Total variable costs
= $37,500 - ($7 + $0.25) x 5,000 units
= $37,500 - $36,250
= $1,250

This means that the special order will generate a profit of $1,250 for Lattimer. Therefore, the best choice is C.

Lattimer Company Had the Following Results of Operations for the Past