Question

Kolar Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. Kolar Manufacturing has excess capacity. The following per unit data apply for sales to regular customers: Variable costs: Direct materials $80 Direct labor 40 Manufacturing support 70 Marketing costs 30 Fixed costs: Manufacturing support 90 Marketing costs 30 Total costs 340 Targeted selling price $510 What is the change in operating profits if the one-time-only special order for 1,000 units is accepted for $360 a unit by Kolar?

Answer 1

Answer:

$ 140,000

Explanation:

Data:

Variable cost for the product:

Direct material = $ 80

Direct labor cost = $ 40

Manufacturing support =$ 70

Marketing cost = $ 30

Thus, the total variable cost = $ 80 + $ 40 + $ 70 + $ 30 = $ 220

Fixed costs for the product:

Manufacturing support = $ 90

Marketing costs = $30

Total costs = $ 340

Targeted selling price = $ 510

Accepted price for a unit by Kolar, i.e the selling price = $ 360

Now,

the change in operating profit will be from the variable costs only as the fixed costs cannot be altered.

Thus,

the contribution margin for the single unit = Selling price -  Total variable cost

or

the contribution margin for the single unit = $ 360 - $ 220 = $ 140

Therefore,

the change in operating profits for the 1,000 units

= contribution margin per unit × 1000

or

the change in operating profits for the 1,000 units  = $ 140 × 1000

or

the change in operating profits for the 1,000 units = $ 140,000