Boone Products had the following unit costs: $\begin{array}{llr}
\text { Direct materials } &\$24\
\text { Direct labour} &10\
\text { Variable factory overhead} &8\
\text {Fixed factory overhead (allocated) } &18
\end{array}$

A one-time customer has offered to buy 2,000 units at a special price of $48 per unit.Because of capacity constraints,1,000 units will need to be produced during overtime.Overtime premium is $8 per unit.How much additional profit or loss will be generated by accepting the special order?

Question

Boone Products had the following unit costs: $\begin{array}{llr}
  \text { Direct materials } &\$24\
 \text {  Direct labour} &10\
 \text {  Variable factory overhead} &8\
 \text {Fixed factory overhead (allocated)  } &18
\end{array}$

A one-time customer has offered to buy 2,000 units at a special price of $48 per unit.Because of capacity constraints,1,000 units will need to be produced during overtime.Overtime premium is $8 per unit.How much additional profit or loss will be generated by accepting the special order?

Quizplus · Accepted Answer

To determine the additional profit or loss, we need to compare the incremental revenue from the special order to the incremental costs associated with the order.

Incremental Revenue:

The customer has offered to buy 2,000 units at a special price of $48 per unit, which results in incremental revenue of:

Incremental revenue = 2,000 * $48 = $96,000

Incremental Costs:

We need to consider the incremental costs associated with the production of the additional 1,000 units. The variable cost per unit is $26.50, and the overtime premium is $8 per unit.

Therefore, the incremental cost per unit would be:

Incremental cost per unit = Variable cost per unit + Overtime premium
= $26.50 + $8
= $34.50

So, the incremental cost of producing 1,000 units would be:

Incremental cost = 1,000 * $34.50 = $34,500

Additional profit or loss:

Incremental revenue - Incremental cost = Additional profit/loss

$96,000 - $34,500 = $61,500

Since the incremental profit is positive, accepting the special order would result in additional profit of $61,500.

Boone Products Had the Following Unit Costs A One-Time Customer Has Offered to Buy 2,000 Units at