Costa Company has a capacity of 40,000 units per year and is currently selling 3
ID: 2624952 • Letter: C
Question
Costa Company has a capacity of 40,000 units per year and is currently selling 35,000 for $400 each. Barton Company has approached Costa about buying 2,000 units for only $300 each. The units would be packaged in bulk, saving Costa $20 per unit when compared to the normal packaging cost. Normally, Costa has a variable cost of $280 per unit. The annual fixed cost of $2,000,000 would be unaffected by the special order. What would be the impact on profits if Costa were to accept this special order?
options:
A. Profits would increase $40,000.
B. Profits would increase $60,000.
C. Profits would decrease $200,000.
D. Profits would increase $80,000
Explanation / Answer
Savings in variable cost per unit = $20 (packing cost)
Net variable cost incurred per unit = $280 - $20 = $260 per unit
As fixed costs are not going to increase due to this order of 2000 units, they are going to be irrelevant in decision making.
Increase in profit due to acceptance of order = No. of units x (Selling price for special order