M7-5 Analyzing a Special-Order Decision [LO 7-2, 7-3] Blowing Sand Company has j

Question

M7-5 Analyzing a Special-Order Decision [LO 7-2, 7-3] Blowing Sand Company has just received a one-time offer to purchase 11,400 units of its Gusty model for a price of $40 each. The Gusty model costs $44 to produce ($34 in variable costs and $10 of fixed overhead). Because the offer came during a slow production month, Blowing Sand has enough excess capacity to accept the order. 1. Should Blowing Sand accept the special order? O Yes O No 2. Calculate the increase or decrease in short-term profit from accepting the special order by

Explanation / Answer

1.YES.

the project should be accepted since the price offered ($40) is greater than variable cost per unit ($34).

2.

note:

the profit from new order = (special price - variable cost) * number of units

=> ($40 - 34) * 11,400

=>$6 * 11,400

=>$68,400.

Profit Increases by $68,400

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