Chandler manufactures a single product with the following full unit costs for 3,

Question

Chandler manufactures a single product with the following full unit costs for 3,000 units:

Direct materials $80

Direct labor 40

Manufacturing overhead (40% variable) 120

Selling expenses 40

Administrative expenses (10% variable) 20

Total per unit $300

A company recently approached Chandler with a special order to purchase 500 units for $300. Chandler currently sells the models to dealers for $550. Capacity is sufficient to produce the extra 1,000 units. No selling expenses would be incurred on the special order.

a. Should Chandler accept the special order if its goal is to maximize short-run profits? Determine the impact on profit of accepting the order. b. Determine the minimum price Chandler would want, to increase profits by $80,000 on the special order of 500 units.

Explanation / Answer

All amounts are in $

Ans a. Total variable cost to be incur if company will accept the offer for 500 units at $300.

Direct Material = 80

Direct Labour = 40

Manufacturing Overhead = 48

Selling expenses = 0 (No selling cost will be incur)

Administrative Expenses = 2

Total variable cost = 170

So we can see that total relevant cost is $170 and offer price is $300, so it will be a profitable offer.

Chandler manufacturers should accept the offer at $300.

Impact on Profit after accepting the order = ($300 - $170)*500 = $65000.

Profit will increase by $65000 after accepting the order.

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