Zephram Corporation has a plant capacity of 200,000 units per month. Unit costs

Question

Zephram Corporation has a plant capacity of 200,000 units per month. Unit costs at capacity are:

Direct materials $4.00

Direct labor 6.00

Variable overhead 3.00

Fixed overhead 1.00

Marketing—fixed 7.00

Marketing/distribution—variable 3.60

Current monthly sales are 190,000 units at $30.00 each. Q, Inc., has contacted Zephram Corporation about purchasing 2,000 units at $24.00 each. Current sales would not be affected by the one-time-only special order. What is Zephram's change in operating profits if the one-time-only special order is accepted?

A) $14,800 increase B) $17,200 increase C) $22,000 increase D) $33,200 increase

Answer: A Explanation: A) ($4.00 + $6.00 + $3.00 + $3.60) = $16.60 ($24.00 - $16.60) × 2,000 = $14,800 increase

My basic question is as I know that marketing cost is not considered when calculating mimimum accepting price for the special order. However, in this question, it seems like that they consider variable marketing cost to calculate the differences of operating income. So, how is the variable marketing cost should be considered in the special order?

Explanation / Answer

Current Special Order Units 190000 Selling Price 30 Sales 5700000 5748000 Direct Material 4 760000 768000 Direct Labor 6 1140000 1152000 Variable Overhead 3 570000 576000 Fixed Overhead 1 200000 200000 Fixed- Marketing 7 1400000 1400000 Marketing Variable 3.6 684000 4754000 684000 4780000 Net Income 946000 968000 Increase in Net Income (968000-946000) The correct option is C) $ 22000 increase The variable marketing cost will not be considered for the units of special order as there will be no marketing cost for 2000 Units It will be for only 190000 units

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