Question

1. Baylor Inc. has a capacity of 85,000 units per year and the company currently makes and sells 78,000 units a year. The normal sales price is $120 per unit, variable costs are $90 per unit, and fixed expenses are $2,000,000. An out-of-state distributor has offered to buy 12,000 units at $105 per unit. If cost structure will not change, what will be the additional or profit or loss if the order is accepted?

Answer 1

Given:

Current selling price per unit                = $ 120

Current variable cost per unit               = $ 90

Current total fixed cost = $ 2,000,000

If additional order is accepted:

New selling price per unit                    = $ 105

New variable cost per unit                   = $ 90 (no changes)

Total fixed cost (no need to incurred if additional production is increased)

Additional profit or loss if order is accepted:

Sales                (12,000 units * $ 105 per unit)            = $ 1,260,000

(-) Variable cost (12,000 units * $ 90 per unit)            = $ 1,080,000

Therefore contribution = $     180,000

(-) fixed cost = $       - (no need to incurred for additional production)

Profit = $ 180,000

So, additional order will be accepted for $ 105. Because, there is a profit for $ 180,000.