Question

29 At the Kicher Company's current activity level of 8,000 units per month, the costs of producing and selling one unit of the company's only product are as follows: 01:06 14 Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses 35.00 $6.00 $1.00 $9.00 $3.00 $4.00 Print The normal selling price is $26 per unit. An order has been received from a potential customer overseas for 4,000 units at a price of $24.00 per unit. This order would not affect regular sales. The company's capacity is 12.000 units per month and enough excess capacity exists to fill this order Required: 1. If the order is accepted, by how much will monthly profits increase or decrease? (The order would not change the company's total fixed costs)

Answer 1

Particulars Amount Selling Price $ 24.00 Less : Direct Materials $ 5.00 Direct Labour $ 6.00 Variable Manufacturing Overhead $ 1.00 Variable Selling and Administrative Expense $ 3.00 Profit Per Unit $ 9.00 Increase in profits : 4000 units x $9 $ 36,000 Note : Since the Order is in within capacity, It doesn't affect regular sales. So Only Variable Cost will be taken into consideration. Fixed Costs are sunk costs and are irrelevant for decision making