Each month Fig Company produces 11,000 units of a product that sells for $18 per unit,and has variable costs of $12 per unit.Total fixed costs for the month are $77,000.A special order is received for 5,000 units at a price of $14 per unit.Fig Company has adequate capacity for the special order.If Fig Company accepts the special order,what is the profit to Fig Company?
A)There is no profit; it is loss.
B)$10,000
C)$22,000
D)$99,000

Question

Quizplus · Accepted Answer

First, let's calculate the profit for producing the regular 11,000 units:

Total revenue = 11,000 x $18 = $198,000
Total variable costs = 11,000 x $12 = $132,000
Total contribution margin = $66,000

Now, let's add in the fixed costs:

Total contribution margin - fixed costs = $66,000 - $77,000 = ($11,000)

This means that producing the regular 11,000 units results in a loss of $11,000 for the company.

Next, let's calculate the profit for the special order:

Total revenue = 5,000 x $14 = $70,000
Total variable costs = 5,000 x $12 = $60,000
Total contribution margin = $10,000

Since there are no additional fixed costs associated with the special order, the entire contribution margin of $10,000 goes towards profit.

Therefore, by accepting the special order, Fig Company would make a profit of $10,000, which is the best choice.

Each Month Fig Company Produces 11,000 Units of a Product