Preston Concrete is a major supplier of concrete to residential and commercial b

Question

Preston Concrete is a major supplier of concrete to residential and commercial builders in the Pacific Northwest. The company's general pricing policy is to set prices at $129 per cubic yard. Deliveries for 2013 were 400,000 cubic yards. Total costs were:

Near the end of 2013, Fairview Construction Company asked for a delivery of 4,900 cubic yards of concrete but was unwilling to pay the regular price; it was only willing to pay $87 per cubic yard. Preston estimated that the job would require 7,100 miles of driving and 290 truck hours. The housing market in the Pacific Northwest had slowed during recent months, leaving Preston with enough capacity to fill the order, but its sales manager was reluctant to commit to such a reduced price.

REQUIRED

If Preston accepted the offer, what would the profit or loss have been (enter a loss as a negative number)?

Explanation / Answer

Hi,

Please find the answer as follows:

Total Variable Costs = 21480000 (Direct Material) + (6000000 - 1500000) (Yard Operating Costs) = 25980000

Variable Cost Per Cubic Yard = Total Variable Costs/Total Cubic Yards = 25980000/400000 = 64.95

Estimated Profit/Loss = 4900*(87 - 64.95) - 7100*6 - 290*40.50 = 53700

Answer is 53700

Notes:

You will have to consider only the variable cost to calculate the profit/loss on the special order.

Thanks.

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