Blue technologies manufactures and sells DVD players. Great Product Company has

Question

Blue technologies manufactures and sells DVD players. Great Product Company has offered Blue Technologies $21 per DVD player for 10,000 DVD players. Blue Technologies normal selling price is $30 per DVD player.   The total manufacturing cost per DVD player is $18 and consists of variable costs of $11 per DVD plager and fixed overhead costs of $3 per dvd player. (assums excess capacity and no effect on regular sales)
how much are the expected increase (decrease) in revenues and expenses from the special sales order?

Explanation / Answer

Calculation of sales value:

Normal Sales value = 10000*30 = $ 300000

Sales Value as per Offer = 10000*21 = $ 210000

Decrease in sales value compared to normal price = $ 300000 - $ 210000 = $ 90000

Principle : Manufacturing costs mean indirect costs that are necessary to support the manufacturing process allocated to each unit of production.

Eg : Depreciation of manufacturing Equipment , Property Taxes and Insurance on Manufacturing Equipment etc,

Fixed Costs are those costs which are not changed based on production volume( i.e irrespective of sales volume fixed costs are not changed).

Eg: Rent, Salaries etc;

Assumption : Manufacturing Cost and Fixed cost already covered by normal sales

Based on the assumption above

Increase in Variable Cost = 10000* 11 = $ 110000.

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