Rocket Life manufactures small toy rockets. At their normal level of activity of

Question

Rocket Life manufactures small toy rockets. At their normal level of activity of 50,000 units, the cost of producing a single rocket is:

The company sells each rocket for $20 per unit. The company has capacity to produce 60,000 rockets per year, even though they produce only 50,000.

A special order has been received for 5,000 rockets at a special price of $10 per unit. If the order is accepted, by how much will the annual profits be increased or decreased? Please note that the order will not affect the company's fixed costs in any way. Please show the calculation.

Direct Materials $4.00 Direct Labor $2.00 Variable Manufacturing Overhead $1.00 Fixed Manufacturing Overhead $3.00 Variable Selling & Admin Expenses $2.00 Fixed Selling & Admin Expenses $3.00

Explanation / Answer

Per unit 5000 units Revenue 10 50000 Incremental costs: Direct Materials 4 20000 Direct Labor 2 10000 Variable Manufacturing Overhead 1 5000 Variable Selling & Admin Expenses 2 10000 Incremental income 5000 If the order is accepted, the annual profits will be increased $5000

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