Potlatch Company manufactures sonars for fishing boats. Model 100 sells for $200. Potlatch produces and sells 5,000 of them per year. Cost data are as follows:
$$\begin{array} { |l | r | r | }
\hline\text { Variable manufarturing } & \$ 105.00 & \text { Per unit } \
\hline \text { Variable marketing } & \$ 5.00 & \text { Per unit } \
\hline \text { Fixed manufacturing } & \$ 270,000 & \text { Per year } \
\hline \text { Fixed marketing \& admin } & \$ 140,000 & \text { Per year } \
\hline
\end{array}$$
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A potential deal has come up for a one time sale of 25 units at a special price of $105 per unit. The marketing manager says that the sale will not negatively impact the company's regular sales activities, but it will require the normal amount of variable marketing costs. The production manager says that there's plenty of excess capacity and the deal will not impact fixed costs in any way. The controller points out, however, that because the incremental revenues are just equal to the incremental costs to fill the order, the deal will not have any impact on the bottom line whatever. The controller is correct in his statement.

Question

Potlatch Company manufactures sonars for fishing boats. Model 100 sells for $200. Potlatch produces and sells 5,000 of them per year. Cost data are as follows:
 $$\begin{array} { |l | r | r | } 
\hline\text { Variable manufarturing } & \$ 105.00 & \text { Per unit } \
\hline \text { Variable marketing } & \$ 5.00 & \text { Per unit } \
\hline \text { Fixed manufacturing } & \$ 270,000 & \text { Per year } \
\hline \text { Fixed marketing \& admin } & \$ 140,000 & \text { Per year } \
\hline
\end{array}$$ 
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A potential deal has come up for a one time sale of 25 units at a special price of $105 per unit. The marketing manager says that the sale will not negatively impact the company's regular sales activities, but it will require the normal amount of variable marketing costs. The production manager says that there's plenty of excess capacity and the deal will not impact fixed costs in any way. The controller points out, however, that because the incremental revenues are just equal to the incremental costs to fill the order, the deal will not have any impact on the bottom line whatever. The controller is correct in his statement.

Quizplus · Accepted Answer

The controller is incorrect because the special order will contribute to covering fixed costs. The incremental revenue ($105 per unit) minus the variable costs ($105 + $5 = $110 per unit) results in a loss of $5 per unit, but since fixed costs are not impacted, the special order will not affect the bottom line negatively.

Potlatch Company Manufactures Sonars for Fishing Boats - a Potential Deal Has Come Up for a One

Potlatch Company Manufactures Sonars for Fishing Boats -
a Potential Deal Has Come Up for a One