Costa Company has a capacity of 40,000 units per year and is currently selling 3
ID: 2644534 • 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?
Explanation / Answer
Here the Costa Company has a production capacity of 40,00 units per year and the fixed cost is $ 2000,000 the standard fixed cost is absorbed is $50 per units on the capacity basis.
However there is capacity gap of 5000 units per year [ 40000 - 35000] = 5000 units per year and the additional order are falling within the idle capacity, therefore there will be no impact on the the fixed overhead cost . The variable cost of the special order will play the profitability.
The bulk package unit will save $ 20 per unit , then the effective variable cost per unit stood as $ [ 280-20] = 260 per unit.
the offer price is $ 300 per unit ,
The contribution per unit will be $ [ 300-260] = $40 per unit
The order size is 2000 units per year
On acceptance and execution : Then the Profit will be INCREASED by $ 2000 X 40 = 80,000 per year. despite the lower price.