Question

The Parton Company has gathered the following information for a unit of it's most popular product:

Direct Materials: $20

Direct Labor: $15

Overhead (60% variable): $20

Cost to Manufacture: $55

The above cost information is based on 10,000 units. Parton currently sells 8,500 units for $62 per unit. A distributor has offered to buy 1,000 units at a price of $50 per uni. This special order would not disturb regular sales.

Required:

A) Calculate Parton's change in operating profits if the special order is accepted.

B) How many units of regular sales could be lost before this contract is not profitable?

Answer 1

A	Operation profit if special order is accepted
		$	$
	Sales ( 8,500 units x$ 62 )		527,000
	Special order sales ( 1,000 units x $ 50 )		50,000
	Total Sales revenue ( A )		577,000
	Less: Variable costs;
	Direct Material ( 9,500 units x $ 20 )	190,000
	Direct Labor ( 9,500 units x $ 15 )	142,500
	Variable overhead ( 9,500 units x $ 20 x 60% )	114,000
	Total variable costs ( B)		446,500
	Contribution Margin ( A )- ( B)		130,500
	Less: Fixed costs ( 10,000 units x $ 20 x 40% )		(80,000)
	Net Operating Profit		50,500
B		$	$
	Selling price for the contract		50
	Less: Variable costs;
	Direct Material	20
	Direct Labor	15
	Variable overhead ( $ 20 x 60% )	12
	Total variable costs ( B)		47
	Contribution Margin ( A )- ( B)		3
	Normal selling price		60
	Less: Variable costs;
	Direct Material	20
	Direct Labor	15
	Variable overhead ( $ 20 x 60% )	12
	Total variable costs ( B)		47
	Contribution Margin ( A )- ( B)		13
	Contribution loss on special contract ( $ 13 - $ 3 )	10