Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for £30. Manufacturing and other costs are as follows: The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year.
An Atlanta wholesaler has proposed to place a special one-time order for 7,000 units at a special price of £25.20 per unit. The wholesaler would pay all distribution costs, but there would be additional fixed selling and administrative costs of £6,000. In addition, assume that overtime production is not possible and that all other information remains the same as the original data. What is the effect on profits if the special order is accepted?

Question

Quizplus · Accepted Answer

The total revenue from the special order would be 7,000 units × £25.20 per unit = £176,400. The variable costs associated with the special order would be the same as the regular production and sales, but the fixed costs associated with the special order would be an additional £6,000.

Therefore, the total profit contribution from the special order would be:

(Total revenue - Variable costs - Additional fixed costs)

= (£176,400 - (7,000 units × Variable distribution cost per unit) - £6,000)

= (£176,400 - (7,000 units × £1.20 per unit) - £6,000)

= £94,800

This is an increase in profit contribution of £94,800 - (£30 per unit × 20,000 units) = £30,800 over the regular production and sales. Therefore, the effect on profits if the special order is accepted is an increase of £30,900 (£30,800 profit contribution less £900 decrease in regular profit contribution due to decrease in sales volume).

Miller Company Produces Speakers for Home Stereo Units