Question

Sales for the Springfield Division of a large company have been off for several years making the plant far under its capacity of 150,000 units of its only product, D42. This year the company plans to produce and sell 150,000 units of D42 at a $45.00 per unit sales price.  The per unit cost to produce and sell the D42 is comprised of $15.00 in fixed costs per unit and $20.00 in variable costs per unit. The company received a special order from a foreign customer for 2,500 of the D42s at a price of $32.00. This order can be completed without increasing the fixed costs of the operation but special packaging will be required that will increase the unit cost by $2.00.  In addition, the shipping costs will increase by $4.00 per unit.  

What is the financial impact of accepting the special order? In addition, the financial impact would be an increase or decrease in operating income?

Answer 1

i) Here firstly we will calculate what is operating income company has planned to produce 2500 units of D42.

Company has planned to sale it @$25 per unit , Hence Projected Sales Revenue = 2500 x $45=$112,500.

Variable cost is 2500 x $20 =$50000. Fixed cost =2500 x $15 =$37,500.

Hence Planned operating income would be = Sales -Variable Cost -Fixed Cost =$112,500-$50,000-$37,500=$25000.

And if we accept the order then Actual Sales would be 2500 x$32=$80,000. Here there is no change of Fixed cost so Fixed Cost = 2500 x$15=$37,500 but here in cost Additional packaging cost will increase by $2 per unit and Shipping would be increase by $4 per unit Hence total Variable cost = $2500 x$20 +2500 x $2+2500 x $4=$65,000.

So operating profit would be = Sales -Variable cost -Fixed cost =$80,000-$37,500-$65,000=($22500)

Hence hence company will get a operating loss of $22500 if they accept the foreign order.

So we can say company should not accept the order .

ii) Here planned company is expecting to earn $25000 operating profit by sale of 2500 units , But if they accept foreign order of 2500 units @$32 per unit there is a operational loss of $22500 . So total operating income to be decrease $47,500 (22500 +$25000) if they accept the order.