Question

In: Accounting

ABC Company. has the capacity to produce 15,000 lamps each month. Current regular production and sales...

ABC Company. has the capacity to produce 15,000 lamps each
month. Current regular production and sales are 12,000
lamps at a selling price of $16 each. The costs of making
each lamp is:

direct materials         $5.00                          
direct labor              3.00                          
variable overhead         1.00
fixed overhead            1.25
variable selling costs    0.20
fixed selling costs       0.75

ABC Company has received a special order who wants to buy
6,000 lamps at a reduced price of $13 per lamp. ABC Company
has determined that there would be no selling expenses in
connection with this special order. 

Calculate the increase in company profits if ABC Company
accepts the special order.

Expert Solution

ABC COMPANY -

CAPACITY TO PRODUCE - 15,000 LAMP EACH MONTH

CURRENT PRODUCTION AND SALES = 12,000 LAMPS @ SALES PRICE OF $16 EACH

COST OF EACH LAMP IS

DIRECT MATERIAL = $5

DIRECT LABOUR - $ 3

VARIABLE OVERHEAD - $1

FIXED OVERHEAD - $1.25

VARIABLE SELLING COST - $ 0.2

FIXED SELLING COST - $.75

COMPANY RECEIVED A SPECIAL ORDER

PRODUCTION AND SALES REQUIRED = 6000 LAMPS @ REDUCED PRICE $13

AND NO SELLING COST IN CONNECT WITH THIS ORDER

-

COMPANY PRESENT TOTAL PROFIT -

NET PROFIT= SALES REVENUE - VARIABLE MANUFACTURING COST - FIXED MANUFACTURING COST - VARIABLE SELLING COST - FIXED SELLING COST

= $192,000 - $108,000 - $15,000 - $2400 - $9000 ( WORKING NOTES 1)

= $57,600

WORKING NOTES 1

SALES REVENUE = 12,000 * $16 = $192,000

VARIABLE MANUFACTURING COST = 12,000 * 9 (5+3+1) = $108,000

FIXED MANUFACTURING COST = 12,000 * $1.25 = $15,000

VARIABLE SELLING COST = 12,000 * $0.2 = $2400

FIXED SELLING COST = 12,000 * $.75 = $9000

COMPANY TOTAL PROFIT IF ACCEPT SPECIAL ORDER -

NET PROFIT= SALES REVENUE - VARIABLE MANUFACTURING COST - FIXED MANUFACTURING COST - VARIABLE SELLING COST - FIXED SELLING COST

= $222,000 - $135,000 - $15,000 -$1800 - $9000 ( WORKING NOTES 2 )

=$ 61,200

WORKING NOTES 2 -

SALES REVENUE =(9,000 * $16 ) + (6000 * 13 ) = $222,000

VARIABLE MANUFACTURING COST = 15000 * 9 ( 5+3+1) = $135,000

FIXED MANUFACTRING COST = $15,000

VARIABLE SEELING COST = 9000 *$0.2 = $1800

FIXED SELLING COST =$9000

SO THE ANSWER IS-

INCREASE IN PROFIT = $61,200 - $57,600

= $3600

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