Rosario Manufacturing Company had the following unit costs: Direct materials $24
Direct labor 8
Variable factory overhead 10
Fixed factory overhead (allocated) 18
A one-time customer has offered to buy 2,750 units at a special price of $49 per unit. Assuming that sufficient unused production capacity exists to produce the order and no regular customers will be affected by the order, how much additional profit (loss) will be generated by accepting the special order?
A) $134,750 profit
B) $19,250 profit
C) $84,000 loss.
D) $16,500 loss

Question

Quizplus · Accepted Answer

To determine the additional profit (loss) from accepting the special order, we need to calculate the incremental revenue and the incremental costs. The incremental revenue is simply the price per unit offered in the special order, which is $49 per unit. The incremental cost includes only the variable costs, as fixed costs do not change with the decision to accept the order.

Incremental cost per unit = Direct materials + Direct labor + Variable factory overhead = $24 + $8 + $10 = $42 per unit

Therefore, the contribution margin per unit is:

Contribution margin per unit = Incremental revenue - Incremental cost per unit = $49 - $42 = $7 per unit

Total contribution margin from the order = $7 x 2,750 units = $19,250 profit.

Since the incremental revenue exceeds the incremental cost per unit, accepting the special order will generate additional profits for the company, and the best choice is B.

Rosario Manufacturing Company Had the Following Unit Costs: Direct Materials