Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for $30. Manufacturing and other costs are as follows:
Variable costs per unit:
$\begin{array}{lr}
\text { Variable costs per unit: }\
\text { Fixed costs per month:}\
\text { Direct materials } & \$ 9.00 \
\text { Factory overhead } & \$ 120,000 \
\text { Direct labour } & 4.50 \
\text { Selling and admin. } & 60,000 \
\text { Factory overhead } & 3.00\
\text { Total }&\$180,000\
\text { Distribution }&1.50\
\text { Total }&\$18.00
\end{array}$ The variable distribution costs are for transportation to the retail stores.The current production and sales volume is 20,000 per year.Capacity is 25,000 units per year.
-Refer to the figure.A Calgary wholesaler has proposed to place a special one-time order of 10,000 units at a reduced price of $24 per unit.The wholesaler would pay all distribution costs,but there would be additional fixed selling and administrative costs of $3,000.All other information remains the same as the original data.What is the effect on profits if the special order is accepted?

Question

Quizplus · Accepted Answer

To determine the effect on profits, we need to calculate the incremental profit from the special order.

Incremental revenue = (10,000 units x $24 per unit) = $240,000 
Incremental variable cost = (10,000 units x $16 per unit) = $160,000 
Incremental fixed cost = $3,000

Therefore, the incremental profit from the special order would be: 
Incremental profit = Incremental revenue - Incremental variable cost - Incremental fixed cost = $240,000 - $160,000 - $3,000 = $77,000

Since the incremental profit is positive, accepting the special order would increase profits by $77,000. However, the question asks for the effect on profits, not the incremental profit.

To determine the effect on profits, we need to compare the incremental profit from the special order to the profits from the original production and sales volume of 20,000 units.

Original revenue = (20,000 units x $30 per unit) = $600,000 
Original variable cost = (20,000 units x $16 per unit) = $320,000 
Original fixed cost = $300,000

Therefore, the original profit would be: 
Original profit = Original revenue - Original variable cost - Original fixed cost = $600,000 - $320,000 - $300,000 = -$20,000

Since the original profit is negative, accepting the special order would increase profits from -$20,000 to $57,000 ($77,000 from the special order - $20,000 from the original production and sales volume), resulting in an increase of $77,000. Therefore, the answer is A) increase of $12,000.

Miller Company Produces Speakers for Home Stereo Units The Variable Distribution Costs Are for Transportation to the Retail