Question

The Peterson Corporation manufactures a product that it sells for $68.41. The variable costs are $39.89 and the annual fixed costs are $985341. Peterson’s capacity is 100544 units per year but is currently only selling 92251 units per year. This is not expected to change in the future.

Peterson was approached to provide 36462 units as a one-time order for a price of $47.90 per unit. If Peterson accepts the special order, what will be the impact on operating income?

Answer 1

	DATA AVAILABLE
	Selling Price Per unit=	$                            68.41
	Variable Cost Per unit	$                            39.89
	Contribution margin per unit	$                            28.52
	Spare Capacity = Capacity to prodcue - Expected Production
	Full Capacity =	100544	units
	Currently Selling	92251	units
	Spare Capacity.	8293	units
	Sprecial Order	36462	units
	Required from current selling	28169	units
	Option 1 = Sells in market	92251	units
	Option 2 = Sells in market	64082	units
	& Special order	36462	units
	Total	100544	units
	Fixed Cost	$                9,85,341.00
	CALCULATION OF INCREAMENTAL PROFIT FROM ACCEPTING THE ORDERS
		Produce 92,251 Units	Produce 100,544 Units
	Sales in the market	$                    63,10,891	$                43,83,850
		(92,251 X $ 68.41)	(64,082 X $ 68.41)
	Sales to Special customers	$                                   -	$                17,46,530
			(36,462 X $ 47.90)
	Total Sales	$                    63,10,891	$                61,30,379
	Less: Variable Cost	$              36,79,892.39	$          40,10,700.16
		(39.89 X 92,251)	(39.89 X 100,544)
	Contribution margin	$              26,30,998.52	$          21,19,679.26
	Less: Fixed Manufacturing Overhead	$                9,85,341.00	$            9,85,341.00
	Net Profit	$              16,45,657.52	$          11,34,338.26
	Differnce	$                5,11,319.26
	Answer = There is loss of $ 511,319.26 on accepting the offer