Preston Concrete is a major supplier of concrete to residential and commercial b

Question

Preston Concrete is a major supplier of concrete to residential and commercial builders in the Pacific Northwest. The company's general pricing policy is to set prices at $128 per cubic yard. Estimated deliveries for 2012 were 400,000 cubic yards. Estimated total costs for 2012 included:

29% of the estimated yard operation costs were fixed, and all of the administrative costs were fixed. In addition to the costs above, estimated fixed delivery costs were $195,000 for the year, and estimated variable delivery costs were $8.00 per mile and $41.50 per truck hour. The rate per mile reflects the fact that more miles result in more gas, oil, and maintenance. The rate per truck hour reflects the fact that trucks that are waiting at a jobsite are kept running (so the concrete mix won't solidify), and drivers continue to get paid during that time.

Near the end of 2012, Fairview Construction Company asked for a delivery of 5,200 cubic yards of concrete but was unwilling to pay the regular price; it was only willing to pay $83 per cubic yard. Preston estimated that the job would require 6,900 miles of driving and 270 truck hours. The housing market in the Pacific Northwest had slowed during recent months, leaving Preston with enough capacity to fill the order, but its sales manager was reluctant to commit to such a reduced price.

REQUIRED

What was the profit or loss from the special order (enter a loss as a negative number)?

Material costs $20,880,000   Yard operation costs $5,200,000   Administrative costs $1,080,000  

Explanation / Answer

Hi,

Please find the answer as follows:

The variable cost is 74.20 as against the offered price of 83. So the profit from special order would be:

Profit = 5200*(83 - 74.20) = 45760

Thanks.

Special Order 400000 Cubic Yards Fixed Variable Variable Cost Per Yard Material costs 20880000

52.2 Yard operation costs 5200000 1508000 3692000 9.23 Administrative costs 1080000 1080000
0 Total Variable Costs
61.43 Delivery Cost 195000 195000

Variable Delivery Cost - Mile


8 Variable Delivery Cost - Truck Hour


41.5




Special Order



Total Variable Costs (5200*61.43) 319436


Variable Delivery Cost - Mile (6900*8) 55200


Variable Delivery Cost - Truck Hour (270*41.5) 11205


Total Cost of Special Order 385841


Per Cu Yard Cost 74.20

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