1) If Capitol accepts the order, what effect will the order have on the company’
ID: 2588831 • Letter: 1
Question
1) If Capitol accepts the order, what effect will the order have on the company’s short-term profit? Will it increase or decrease? By how much?
2) What minimum price should Capitol charge to achieve a $45,000 incremental profit?
3) Now assume Capitol is currently operating at full capacity and cannot fill the order without harming normal production and sales. If Capitol accepts the order, what effect will the order have on the company’s short-term profit? Will profits increase or decrease?
Capitol has received a special order for 2,160 units of its product at a special price of $155. The product normally sells for $216 and has the following manufacturing costs: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Per unit $ 55 35 25 45 160 Unit cost Assume that Capitol has sufficient capacity to fill the order without harming normal production and sales and all fixed overhead is unavoidable.Explanation / Answer
1) contribution on special order selling price per unit 155 less variable costs direct materials 55 direct labor 35 variable MOH 25 115 contribution on special order 40 short term profit (40*2160)= 86400 thus the short term profit will increase by 86,400 2) 45000/2160 20.83333 so capitol should charge 115+20.83 135.83 min price 3) contribution on regular sales selling price per unit 216 less variable costs direct materials 55 direct labor 35 variable MOH 25 115 contribution on regular sales 101 contribution lost on regular sale(2160*101)= -218160 income from special order 86400 net loss -131760 profits will decrease by -131,760
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