Question

ABC Company produces a single unit that it sells for $20 per unit. ABC has
the capacity to produce 28,000 units each month. ABC is currently selling
19,000 units each month. The costs associated with each unit appears below:
         
direct materials         $5.00                          
direct labor              2.50                          
variable overhead         1.50                          
fixed overhead            1.00
variable selling costs    4.00
fixed selling costs       0.75                

ABC Company has received a special order from a customer who wants to
purchase 15,000 units at a reduced price of $16 per unit. ABC Company
has determined that there would be no selling expenses in connection
with this special order. However, there would be an increased direct
material cost of $2 per unit for the special order units.

Calculate the increase in company profits if ABC Company accepts the
special order.

Answer 1

Solution:

Without Special Order (19000 Units Sold)
Sales (19000*$20)		380000
Less: Costs
Direct Material (19000*5)	95000
Direct Labor (19000*2.50)	47500
variable Overhead (19000*1.5)	28500
Variable Selling (19000*4)	76000
fixed Overhead (19000*1)	19000
fixed selling costs (19000*0.75)	14250
Total Costs		280250
Net Income		99750

With Special Order (28000 Units Sold)
Sales (13000*20+15000*16)		500000
Less: Costs
Direct Material (13000*5+15000*7)	170000
Direct Labor (28000*2.50)	70000
variable Overhead (28000*1.5)	42000
Variable Selling (13000*4)	52000
fixed Overhead	19000
fixed selling costs	14250
Total costs		367250
Net Income		132750

Increase in come = $132750 - 99750 = $33,000