The Molly Corp. makes and sells 400,000 desks each year. The total fixed costs are $40,000,000. Its variable costs are: labor of $90 per desk; direct materials of $300 per desk; and variable overhead of $60 per desk. It normally sells its desks at $600 each. Assuming that it does not have a capacity problem, what would be the effect on its profits if it accepted a special order to make an additional 100,000 desks for $400 each?
A) Profits would decrease by $15,000,000
B) Profits would decrease by $5,000,000
C) Profits would increase by $1,000,000
D) Profits would increase by $5,000,000

Question

Quizplus · Accepted Answer

To determine the effect of the special order on profits, we need to calculate the incremental revenues and incremental costs associated with the order.

Incremental revenues = 100,000 x $400 = $40,000,000

Incremental costs = 
Labor: 100,000 x $90 = $9,000,000
Direct materials: 100,000 x $300 = $30,000,000
Variable overhead: 100,000 x $60 = $6,000,000
Total incremental costs = $45,000,000

Therefore, the incremental profit (loss) from the special order is:

Incremental profit = Incremental revenues - Incremental costs
= $40,000,000 - $45,000,000
= -$5,000,000

Since the incremental profit is negative, accepting the special order would lead to a decrease in overall profits. Therefore, choice B is the correct answer.