The Parton Company has gathered the following information for a unit of it\'s mo
ID: 2540610 • Letter: T
Question
The Parton Company has gathered the following information for a unit of it's most popular product:
Direct Materials: $20
Direct Labor: $15
Overhead (60% variable): $20
Cost to Manufacture: $55
The above cost information is based on 10,000 units. Parton currently sells 8,500 units for $62 per unit. A distributor has offered to buy 1,000 units at a price of $50 per uni. This special order would not disturb regular sales.
Required:
A) Calculate Parton's change in operating profits if the special order is accepted.
B) How many units of regular sales could be lost before this contract is not profitable?
Explanation / Answer
A Operation profit if special order is accepted $ $ Sales ( 8,500 units x$ 62 ) 527,000 Special order sales ( 1,000 units x $ 50 ) 50,000 Total Sales revenue ( A ) 577,000 Less: Variable costs; Direct Material ( 9,500 units x $ 20 ) 190,000 Direct Labor ( 9,500 units x $ 15 ) 142,500 Variable overhead ( 9,500 units x $ 20 x 60% ) 114,000 Total variable costs ( B) 446,500 Contribution Margin ( A )- ( B) 130,500 Less: Fixed costs ( 10,000 units x $ 20 x 40% ) (80,000) Net Operating Profit 50,500 B $ $ Selling price for the contract 50 Less: Variable costs; Direct Material 20 Direct Labor 15 Variable overhead ( $ 20 x 60% ) 12 Total variable costs ( B) 47 Contribution Margin ( A )- ( B) 3 Normal selling price 60 Less: Variable costs; Direct Material 20 Direct Labor 15 Variable overhead ( $ 20 x 60% ) 12 Total variable costs ( B) 47 Contribution Margin ( A )- ( B) 13 Contribution loss on special contract ( $ 13 - $ 3 ) 10
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