Optus Company makes special equipment used in mobile network towers.Each unit sells for $410.Optus produces and sells 12,500 units per year.They have provided the following income statement data:

A foreign company has offered to buy 75 units for a reduced price of $320 per unit.The marketing manager says the sale will not negatively affect the company's regular sales.The sales manager says that this sale will require incremental selling & administrative costs,as it is a one-time deal.The production manager reports that it would require an additional $25,000 of fixed manufacturing costs to accommodate the specifications of the buyer.If Optus accepts the deal,how will this impact operating profit?

Question

Optus Company makes special equipment used in mobile network towers.Each unit sells for $410.Optus produces and sells 12,500 units per year.They have provided the following income statement data:

A foreign company has offered to buy 75 units for a reduced price of $320 per unit.The marketing manager says the sale will not negatively affect the company's regular sales.The sales manager says that this sale will require incremental selling & administrative costs,as it is a one-time deal.The production manager reports that it would require an additional $25,000 of fixed manufacturing costs to accommodate the specifications of the buyer.If Optus accepts the deal,how will this impact operating profit?

Quizplus · Accepted Answer

The revenue from the sale will be:
75 units x $320 per unit = $24,000
The incremental selling & administrative costs and additional fixed manufacturing costs will be:
Incremental selling & administrative costs = $2,500
Additional fixed manufacturing costs = $25,000
Total costs = $27,500
Thus, the impact on operating profit will be:
$24,000 - $27,500 = -$3,500
Therefore, Operating profit will decrease by $9400. Option D is correct.

Optus Company Makes Special Equipment Used in Mobile Network Towers