Question

Rutkey Collectibles is a small toy company that manufactures and sells metal replicas of classic cars. Each car sells for $3.50 The cost of each unit follows:

Materials	$	0.90
Labor		0.60
Variable overhead		0.50
Fixed overhead ($21,700 per month, 21,700 units per month)		1.00
Total costs per unit	$	3.00

One of Rutkey's regular customers asked the company to fill a special order of 800 units at a selling price of $2.50 per unit. Rutkey's can fill the order using existing capacity without affecting total fixed costs for the month. However, Rutkey's manager was concerned about selling at a price below the $3.00 cost per unit and has asked for your advice.

Required:

a. Prepare a schedule to show the impact of providing the special order of 800 units on Rutkey's profits in addition to the regular production and sales of 21,700 units per month.

b. Based solely on the data given, what is the lowest price per unit at which the model cars could be sold for the special order without reducing Rutkey's profits?

c. If Rutkey Collectibles company was operating at capacity, what would happen to operating profit if the special order was accepted?

Answer 1