Lopez Company has been approached by a new customer to provide 2,000 units of it

Question

Lopez Company has been approached by a new customer to provide 2,000 units of its regular product at a special price of $6 per unit. The regular selling price of the product is $8 per unit. Lopez is operating at 75% of its capacity of 10,000 units. Identify whether the following costs are relevant to Lopez's decision as to whether to accept the order at the special selling price. No additional fixed manufacturing overhead will be incurred because of this order. The only additional selling expense on this order will be a $0.50 per unit shipping cost. There will be no additional administrative expenses because of this order.

Calculate the operating income from the order.

Explanation / Answer

Operating at 75% capacity means there is 25% left available to use, this means Lopez could make 10000 x 25% = 2500 more units without exceeding capacity or additional fixed overhead - so the first part is that Lopez has the capacity to make the 2000 unit order.

Because he has the capacity to do so with incurring additional cost other than the $0.50 selling cost, any contribution from the units is worthwhile so his regular selling price is irrelevant in the decision. Providing he sells them above the $0,50 additional selling cost Lopez is getting an additional contribution.

At $6 less the selling cost of $0.50 Lopez is getting a contribution of $5.50 per unit so the net income from the order after selling costs is 2000 x 5.50 = $11000

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