Capitol has received a special order for 2,000 units of its product at a special price of $195. The product normally sells for $260 and has the following manufacturing costs: Per unitDirect materials $78Direct labor 52Variable manufacturing overhead 39Fixed manufacturing overhead 65Unit cost $234Assume that Capitol has sufficient capacity to fill the order without harming normal production and sales and all fixed overhead is unavoidable. a. If Capital accepts the order, what effect will the order have on the company's short-term profit?b. What minimum price should Capital charge to achieve a $65,000 incremental profit?c. Now assume Capital is currently operating at full capacity and cannot fill the order without harming normal production and sales. If Capitol accepts the

Question

order, what effect will the order have on the company's short-term profit?

What will be an ideal response?

Answer 1

a. $52,000 increase in profit = 2,000 × [$195 - ($78 + $52 + $39)]
b. $201.50 = $403,000/2,000
2,000 × ($78 + $52 + $39) + $65,000 = $338,000 + $65,000 = $403,000
c. $130,000 decrease in profits = 2,000 × ($195 - $260)

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.