Question

Lattimer Company had the following results of operations for the past year:

Sales (15,000 units at $11.65)				$	174,750
Variable manufacturing costs	$	92,250
Fixed manufacturing costs		15,750
Selling and administrative expenses (all fixed)		30,750			(138,750	)
Operating income				$	36,000

A foreign company offers to buy 4,300 units at $6.80 per unit. In addition to existing costs, selling these units would add a $0.18 selling cost for export fees. Lattimer’s annual production capacity is 25,000 units. If Lattimer accepts this additional business, the special order will yield a:

Multiple Choice

• $2,795 profit.

• $2,021 profit.

• $6,794 loss.

• $2,494 loss.

• $1,720 loss.

Answer 1

Correct answer----------$2,021 profit.

Working

financial advantage (disadvantage) of accepting the special order
Additional Revenue from offer (4300 x 6.8)	$ 29,240
Less: Total Additional cost due to acceptance of offer	$ 27,219
Financial Advantage	$ 2,021

.

Calculation of Additional Cost of Order
	Per Unit	Total
Variable manufacturing cost	$                      6.15*	$ 26,445
Variable selling expenses	$                      0.18	$ 774
Total Additional cost due to acceptance of order	$                      6.33	$ 27,219

*92250/15000

Fixed selling cost and fixed manufacturing cost will remain same in total whether order is accepted or rejected.