Differential costs: Special order. Assume Road-Runner Shoes has a plant capacity

Question

Differential costs: Special order. Assume Road-Runner Shoes has a plant capacity that can produce 3,000 units per week (each unit is a pair of shoes). Its predicted operations for the week follow:

Sales (2,000 units at $40 each)....................$80,000

Manufacturing Costs

Variable............................................................$15 per unit

Fixed..................................................................$10,000

Marketing and Administrative Costs

Variable (all sales commissions)......................$3 per Unit

Fixed....................................................................$1,500

Should Road-Runner accept a special order for 400 units at a selling price of $30 each? Assume these units are subject to half the usual sales commission rate per unit, and assume no effect on regular sales at regular prices. How will the decision affect the company's operating profit?

Explanation / Answer

Incremental revenue(400×30) $12000 Less incremental cost: Variable manufacturing cost(400×15) $6000 Variable selling Commission(400×1.50) $600 Total incremental cost $6600 Incremental operating income $5400

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