Ratzlaff Company has a current production level of 20,000 units per month. Unit costs at this level are: Current monthly sales are 18,000 units. Jim Company has contacted Ratzlaff Company about purchasing 1,500 units at $2.00 each. Current sales would NOT be affected by the one-time-only special order, and variable marketing/distribution costs would NOT be incurred on the special order. What is Ratzlaff Company's change in operating profits if the special order is accepted?
A)$400 increase in operating profits
B)$400 decrease in operating profits
C)$1,800 increase in operating profits
D)$1,800 decrease in operating profits

Question

Ratzlaff Company has a current production level of 20,000 units per month. Unit costs at this level are:  Current monthly sales are 18,000 units. Jim Company has contacted Ratzlaff Company about purchasing 1,500 units at $2.00 each. Current sales would NOT be affected by the one-time-only special order, and variable marketing/distribution costs would NOT be incurred on the special order. What is Ratzlaff Company's change in operating profits if the special order is accepted?
A)$400 increase in operating profits 
B)$400 decrease in operating profits 
C)$1,800 increase in operating profits 
D)$1,800 decrease in operating profits

Quizplus · Accepted Answer

To determine the change in operating profits, we need to calculate the profit contribution of the special order. Since Ratzlaff Company has excess capacity (producing 20,000 units while only selling 18,000 units), it can accept the special order without affecting current sales.

Profit contribution per unit = Selling price per unit - Variable cost per unit 
= $2.00 - $1.50 
= $0.50

Contribution from the special order = 1,500 units × $0.50 per unit 
= $750

Since there are no additional marketing or distribution costs, the entire contribution will increase operating profits. Therefore, the change in operating profits will be:

Change in operating profits = Contribution from special order 
= $750

Therefore, the correct choice is C, which indicates a $1,800 increase in operating profits.

Ratzlaff Company Has a Current Production Level of 20,000 Units