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 the figure.Assuming Meco Company has excess capacity,what would be the effect on profits of accepting the order?

Question

Quizplus · Accepted Answer

The profit increase from accepting the special order can be calculated by subtracting the variable costs from the revenue generated by the order. The variable cost per unit is $270 - $120,000 / 2,000 units = $150. For 1,000 units, the variable costs are $150,000. The revenue from the special order is 1,000 units * $240 = $240,000. The profit increase is $240,000 - $150,000 = $90,000. However, since all selling and administrative costs are fixed and already accounted for, and the fixed manufacturing costs do not change with this order (due to excess capacity), the entire $90,000 contributes to profit. The mistake in the initial calculation was in not recognizing the correct profit increase, which should be directly calculated from the difference between the special order revenue and the variable costs associated with the order.

Meco Company Produces a Product That Has a Regular Selling