Classic Chairs Company produces and sells 1,000 chairs per month. The normal sal
ID: 2568495 • Letter: C
Question
Classic Chairs Company produces and sells 1,000 chairs per month. The normal sales price is $50 per chair. The costs to produce one chair are $10 of direct materials, $15 of direct labour, $5 of variable overhead, and $6 of fixed overhead. A special order for 200 chairs at $40 each has been received. Assuming fixed overhead costs will not increase and present sales will not be affected, the profit increase or decrease from accepting this special order is: a) $800 increase b) $2,000 decrease c) $2,000 increase d) $8,000 increase ).Explanation / Answer
Assumption in the question = Fixed overhead not increases and present sales value not effected.
Calculation of current profit (before special order)
Net Income if special offer is accepted
Comparative analysis
Particulars Amount Sales price $50 Less : variable cost Direct Material cost $10 Direct Labour cost $15 Variable manufacturing overhead $5 Contribution $20 Contribution value ($20 * 1000 units) $20000 Less : Fixed cost ($6 * 1000) $6000 Net Income $14000