Exhibit 7-2
Jake Company is considering a special order for 5,000 units at a price of $60 per unit.Jake's product normally sells for $84 per unit and has variable manufacturing costs of $45 per unit and variable selling costs of $9 per unit.Fixed manufacturing costs are $150,000 and fixed selling and administrative costs are $300,000.Jake has capacity to produce 30,000 units and is currently producing 20,000 units.If the order is accepted,,Jake will incur legal fees of $7,500 in connection with the order,but there will be no variable selling costs on the special order.
-Refer to Exhibit 7-2.What amount of additional profit or loss will be incurred if the order is accepted?

Question

Quizplus · Accepted Answer

The additional profit from the special order can be calculated as follows: Additional revenue from the special order is 5,000 units at $60 per unit, totaling $300,000. The variable manufacturing costs for these units are 5,000 units at $45 per unit, totaling $225,000. There are no variable selling costs for the special order, but there are legal fees of $7,500. Therefore, the additional profit is $300,000 (revenue) - $225,000 (variable costs) - $7,500 (legal fees) = $67,500. Fixed costs do not change with the special order, so they are not considered in the incremental analysis.

Exhibit 7-2 Jake Company Is Considering a Special Order for 5,000 Units