Help with Activity Resource usage

[craig]

This problem is bugging the hell out of me. Any help appreciated.


Meco Company produces a product that has a regular selling price of $360 per unit. At a typical monthly production volume of 2,000 units, the product's average unit cost of goods sold amounts to $270. Included in this average is $120,000 of fixed manufacturing costs. All selling and administrative costs are fixed and amount to $30,000 per month.

Meco Company has just received a special order for 1,000 units at $240 per unit. The buyer will pay transportation, and the regular selling price will not be affected if Meco accepts the order.

Assuming Meco Company has excess capacity, the effect on profits of accepting the order would be a
a.
$60,000 increase.
b.
$60,000 decrease.
c.
$30,000 increase.
d.
$30,000 decrease.

 

[Ronika]

The question requires you to calculate the cost of goods sold for the order. The answer should be as follows:

COGS per unit: $270
Total COGS for 2,000 Units = $540,000
Less: Fixed Costs = $180,000 (these will be incurred regardless)
Net Variable COGS = $360,000
Variable Cost per Unit = $180
Selling price of order = $240
# of units per order = $1,000
Profit = $60,000

Since the question tells you that they have capacity, the fixed costs will be incurred no matter how many units are produced. I assume the question is asking you for the incremental profit of accepting the order.
Hope this helps.

Ronika
Montreal Financial

 

[craig]

Thank you

Thank you. But, where did you get the $180,000 fixed cost?

 

[Ronika]

I'm so sorry, Craig. The fixed (manufacturing) costs should be $120,000 (I guess I read that wrong).
This translates into an increase of $30,000 as the cost is $210 and selling price is $240.
Hopefully this makes sense.

 

[craig]

thanks

thank you. I may ask for your help later if OK.