Lopez Company has been approached by a new customer to provide 2,000 units of it
ID: 2375648 • Letter: L
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. 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.
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. 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 http://www.double-entry-bookkeeping.com/
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