Question

The Young Company has gathered the following information for a unit of its most popular product:

Direct materials	$	14
Direct labor		6
Overhead (40% variable)		20
Cost to manufacture		40
Desired markup (50%)		20
Target selling price	$	60

The above cost information is based on 10,200 units. A distributor has offered to buy 3,200 units at a price of $45 per unit. The distributor claims this special order would not disturb regular sales at $60. Special packaging and other selling expenses would be an additional $0.50 per unit for the special order. How many units of regular sales could be lost before this contract is not profitable?

Answer 1

Profit per unit = $60 - $14 - $6 - ($20 X 40%) = $32

Total Profit from special order = [$45 - $14 - $6 - ($20 X 40%) - $0.50] X 3,200 = $52,800

Units of regular sales can be lost = $52,800 / $32 = 1,650 units