The following information relates to the Parker Company for the upcoming year. A

Question

The following information relates to the Parker Company for the upcoming year.

Amount Per unit

Sales $9,000,000 $30

Cost of goods sold 7,200,000 24

gross margin 1,800,000 6

operating expenses 675,000 2.25

operating profit 1,125,000 3.75

The cost of goods sold includes $3,000,000 of fixed manufacturing overhead; the operating expenses include $450,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $25.00 per unit has been made to Parker. Fortunately, there will be no additional operating expenses associated with the order and Parker has sufficient capacity to handle the order.

a. How much will operating profits increase if Parker accepts the special order?
b. Assume that Parker is operating at full capacity. How much will operating profits change if Parker accepts the special order?

Show work please.

Explanation / Answer

Current p.u. Order p.u. Revenue 9000000 30 1250000 25 COGS Fixed 3000000 10 0 0 Variable 4200000 14 700000 14 Gross Margin 1800000 6 550000 11 Operating Expenses Fixed 450000 1.5 0 0 Variable 225000 0.75 37500 0.75 Operating profit 1125000 3.75 512500 10.25 a. So, by the special order, profits increase by 512500 b. At full capacity, parker will charge even the fixed costs because it will have to reduce normal sales, hence by the order it will receive only 25 per unit for which it currently receives 30 per unit for 50000 units. Profit decreases by 50000*5 = 250000.

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