The cost of goods sold includes $1,200,000 of fixed manufacturing overhead; the operating expenses include $100,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $7.50 per unit has been made to Magna. Fortunately, there will be no additional operating expenses associated with the order and Magna has sufficient capacity to handle the order. How much will operate profits be increased if Magna accepts the special order?

The correct answer is $100,000.

Explanation:

Following is the information provided:

Sales @$10 per unit                                  $4,000,000

Cost of goods @$8 per unit                    ($3,200,000)

Operating cost @$0.75 per unit              ($300,000)  

Profit for the year                                       $500,000  

Now the company has to calculate variable costs that are relevant here. The variable cost included in cost of goods sold is:

Variable costs per unit = (Cost of goods sold - Fixed Costs included in Cost of goods) / Units Sold

The units sold can be calculated by dividing Sales with selling price per unit. Which is:

Number of units sold = $4,000,000 / $10 per unit = 400,000 Units

Now putting values in the above equation, we have:

Variable costs = ($3,200,000 - $1,200,000) / 400,000  = $5 per unit

Other variable operating costs per unit will also be calculated as it is also a variable cost here. Because the variable operating cost per unit is relevant here for decision making, it would be calculated as under:

Variable operating cost per unit = (Operating Cost - Fixed cost included) / Number of units sold

By putting values, we have:

Variable operating cost per unit = ($300,000 - $100,000) / 400,000 units

= $0.5 per unit

Now we will calculate Net benefits arising from this order. The relevant costs are variable costs and relevant revenues are at the rate $7.5 per unit.

Cost - Benefit analysis:

Savings from sales = 50,000 units * $7.5 per unit =                     $375,000

Variable cost = 50,000 units * $5 per unit =                                 ($250,000)

Variable operating cost per unit = 50,000 units * $0.5 per unit= ($25,000)

Net Saving / (Loss)                                                                           $100,000

So the net gain from this opportunity will be $100,000.

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