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 is operating at capacity and accepting the order would require an offsetting reduction in regular sales,what would be the effect on profits of accepting the order?

Question

Quizplus · Accepted Answer

Accepting the special order at $240 per unit for 1,000 units generates $240,000 in revenue. However, it displaces regular sales of 1,000 units at $360 per unit, resulting in a loss of $360,000 in revenue. The difference is a decrease in revenue of $120,000. Since all costs remain the same (fixed costs are unaffected and variable costs per unit for the displaced units would also be saved), the effect on profits is a decrease of $120,000.

Meco Company Produces a Product That Has a Regular Selling