Question

Jett Company produces a single product and has the capacity to produce
70,000 units of this product each month. The per unit costs of this
product when 70,000 units are produced are shown below:

direct materials         $29.60                         
direct labor               5.80                         
variable overhead          2.50
fixed overhead            17.20
variable selling costs     1.80
fixed selling costs        6.70

The normal selling price of the product is $65.30 per unit. Jett is
currently selling 68,300 units of this product to regular customers.

Jett Company has just obtained a request for a special order of 4,000
units to be shipped at the end of the current month at a discounted
price of $50 per unit. The variable selling costs would only be $1.10
per unit on the special order. 

Calculate the amount of the decrease in company profits if Jett Company
accepts the special order. Do not put a minus sign in front of your
answer.

Answer 1

Answer :-

Here we need to calculate the decrease in company profits if Jett Company accepts the special order .

This is the formula ,

Decrease in company profits if Jett Company accepts the special order = [ Profits without the special order - Profits with the special order ] .

Profits without the special order :-

Total cost = $29.60 + $5.80 + $2.50 + $17.20 + $1.80 + $6.70

= $63.6

Total cost = $63.6

Profits without the special order = [ 68,300 units * $65.30 ] - [ 68,300 units * $63.6 ]

= $4,459,990 - $4,343,880

= $116,110

Profits without the special order = $116,110

Profits with the special order :-

Total costs = $29.60 + $5.80 + $2.50 + $17.20 + $1.10 + $6.70

= $62.9

Total costs = $62.9

Profits with special order = [ 68,300 x $ 65.30 ] + [ 4,000 units * $50 ] - [ $ 63.60 x 68,300 ] - [ $ 62.90 x 4000 ]

= $4,459,990 + $200,000 - $4,343,880 - $251,600

= $4,659,990 - $4,595,480

= $64,510

Profits with special order = $64,510

Finally ,

The decrease in company profits if Jett Company accepts the special order = Profits without the special order - Profits with special order

= $116,110 - $64,510

= $51,600

The decrease in company profits if Jett Company accepts the special order = $51,600

The decrease in company profits if Jett Company accepts the special order = $51,600