Meco Company produces a product that has a regular selling price of $360 per unit.At a typical monthly production volume of 2,000 units,the product's average unit cost of goods sold amounts to $270.Included in this average is $120,000 of fixed manufacturing costs.All selling and administrative costs are fixed and amount to $30,000 per month. Meco Company has just received a special order for 1,000 units at $240 per unit.The buyer will pay transportation,and the regular selling price will not be affected if Meco accepts the order.
Assume that Meco Company has excess capacity.Suppose Meco accepts the order.What would be the effect on profits?
A)a $30,000 increase
B)a $30,000 decrease
C)a $60,000 increase
D)a $60,000 decrease

Question

Quizplus · Accepted Answer

Accepting the special order increases profits by $30,000. The incremental revenue from the special order is $240,000 ($240 per unit x 1,000 units). The incremental costs are the variable costs, which are $150 per unit ($270 total cost per unit - $120,000 fixed costs / 2,000 units), totaling $150,000 for 1,000 units. The difference, $90,000, minus the fixed selling and administrative costs ($30,000, which are unchanged by the order), results in a $60,000 net benefit. However, since the fixed costs were already accounted for in the calculation of the variable cost per unit and are not additional costs incurred by the order, the actual increase in profits is the difference between the incremental revenue and the incremental variable costs, which is $90,000. This was a mistake in the initial calculation. The correct calculation is simply the incremental revenue ($240,000) minus the incremental variable costs ($150,000), resulting in a $90,000 increase in profits, not accounting for any unchanged fixed costs. This correction means the initial explanation was incorrect in its conclusion. The correct profit increase should be calculated by considering the incremental revenue and incremental costs directly related to the special order.

Meco Company Produces a Product That Has a Regular Selling