The Nightingale Corp. makes and sells 200,000 chairs each year. The total fixed costs are $10,000,000. Its variable costs are: labor of $60 per chair; direct materials of $200 per chair; and variable overhead of $40 per chair. It normally sells its chairs at $500 per chair. 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 chairs for $310 each?

Question

Quizplus · Accepted Answer

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

Incremental Revenue: 
The Nightingale Corp. would make an additional 100,000 chairs for $310 each, which would result in incremental revenue of: 
100,000 x $310 = $31,000,000

Incremental Costs: 
Labor: 100,000 x $60 = $6,000,000 
Direct materials: 100,000 x $200 = $20,000,000 
Variable overhead: 100,000 x $40 = $4,000,000 
Total incremental cost = $30,000,000

Profit effect: 
Incremental revenue - Incremental cost 
$31,000,000 - $30,000,000 = $1,000,000

Therefore, profits would increase by $1,000,000 if Nightingale Corp. accepts the special order.