Wolff Ltd. sells product P at a price of $38 a unit. The per-unit cost data are: direct materials $8, direct labor $10, and overhead $12 (25% fixed and 75% variable). Wolff has sufficient capacity to accept a special order for 40,000 units just received. Selling costs associated with this order would be $3 per unit. At a selling price of $33 per unit, the operating profit will
A) Increase by $60,000
B) Increase by $80,000
C) Increase by $120,000
D) Increase by $160,000

Question

Quizplus · Accepted Answer

To calculate the operating profit for the special order, we need to subtract the total cost of producing and selling the 40,000 units from the revenue generated from selling those units.

Total cost per unit:

Direct materials: $8
Direct labor: $10
Variable overhead: 0.75 x $12 = $9
Fixed overhead: 0.25 x $12 = $3
Total variable cost per unit: $8 + $10 + $9 = $27
Total cost per unit: $27 + $3 (fixed overhead) = $30

Total cost for 40,000 units: 40,000 x $30 = $1,200,000

Selling cost per unit for the special order: $3

Revenue generated from selling 40,000 units at $33 per unit: 40,000 x $33 = $1,320,000

Operating profit for the special order: $1,320,000 - $1,203,000 = $117,000

Compared to not accepting the special order and continuing to sell at $38 per unit, the operating profit increases by:

($33 - $30) x 40,000 units - $3 x 40,000 units = $120,000 - $120,000 = $0

However, we need to take into consideration the selling cost of $3 per unit for the special order. This cost reduces the overall increase in profit.

Therefore, the correct answer is C) Increase by $120,000.

Wolff Ltd Sells Product P at a Price of $38 a a Unit