Marcy has received a special order for 2,000 units of its product at a special price of $60. The product normally sells for $80 and has the following manufacturing costs: Per unitDirect materials $24Direct labor 16Variable manufacturing overhead 12Fixed manufacturing overhead 20Unit cost $72Assume that Marcy has sufficient capacity to fill the order without harming normal production and sales and all fixed overhead is unavoidable. a. If Marcy accepts the order, what effect will the order have on the company's short-term profit?b. What minimum price should Marcy charge to achieve a $20,000 incremental profit?c. Now assume Marcy is currently operating at full capacity and cannot fill the order without harming normal production and sales. If Marcy accepts the order, what
effect will the order have on the company's short-term profit?
What will be an ideal response?
a. $16,000 increase in profit = 2,000 × [$60 - ($24 + $16 + $12)]
b. $62 = $124,000/2,000
[2,000 × ($24 + $16 + $12)] + $20,000 = $104,000 + $20,000 = $124,000
c. $40,000 decrease in profits = 2,000 × ($60 - $80)
If the company has sufficient capacity, short-term profit will equal incremental revenues minus incremental (variable) costs. The minimum price charged should therefore equal incremental variable costs plus any desired profit. If the company does not have sufficient capacity, the effect on short-term profit will equal incremental profit from the special order minus the profit that would have been earned from regular sales given up.
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