Question

Southern Company manufactures custom paints and sells to Home Depo, Lowes and others. Their current capacity is 80,000 units per year and they are currently producing 60,000 units (gallon cans of paint). The variable cost per unit is $35 and fixed cost are $300,000 per year. Their normal selling price is $80 per unit. Ace Hardware has submitted a special order to Southern for a one time purchase of 10,000 units for at a price of $55 per unit. If Southern accepts this special order what would be the impact on their Operating Income (OI)? You should not use any dollar ($) signs when providing your answer but use commas where appropriate.

Answer 1

Given, Southern Manufacturing'smanufactures custom paints and its current capacity is 80,000 units.

It produces 60,000 units .

Variable cost is $35

Fixed Costs is $300,000

Ace Hardware submitted a special purchase of 10,000 units at $55.

The cost of 10,000 units to manufacture is

Variable Costs = 10,000 * $35= $35,000

Fixed Overhead Costs = ($300,000*10,000) / 60,0000 = $50,000

Total Cost to manufacture 10,000 units is $85,000

Selling price to Ace Hardware = $10,000 * 55 = $55,000

Total Loss = Cost - sales price = $85,000 - $55,000 = $30,000

If Southern company accepts the order of Ace it gets a loss of $30,000

The loss Southern company wil get if it sales at its own selling price of $80 iis

Loss = Cost to manyufacture-Selling price

= (10,000 * 80) - $85,000

Loss = 5,000

So, net effect on the operating income if Ace accepts and sells the product at $55 instead of $80 there will be an increase in loss by $25,000 ($30,000 - $5,000)