Albatross Products had the following unit costs: $$\begin{array} { l r }
\text { Direct materials } & \$ 24 \
\text { Direct labor } & 10 \
\text { Variable factory overhead } & 8 \
\text { Fixed factory overhead (allocated) } & 18
\end{array}$$ A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Because of capacity constraints, 1,000 units will need to be produced during overtime. Overtime premium is $8 per unit. How much additional profit (loss) will be generated by accepting the special order?
A)$30,000 loss
B)$4,000 profit
C)$24,000 loss
D)$4,000 loss

Question

Albatross Products had the following unit costs: $$\begin{array} { l r } 
\text { Direct materials } & \$ 24 \
\text { Direct labor } & 10 \
\text { Variable factory overhead } & 8 \
\text { Fixed factory overhead (allocated) } & 18
\end{array}$$ A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Because of capacity constraints, 1,000 units will need to be produced during overtime. Overtime premium is $8 per unit. How much additional profit (loss) will be generated by accepting the special order?
A)$30,000 loss
B)$4,000 profit
C)$24,000 loss
D)$4,000 loss

Quizplus · Accepted Answer

The cost per unit is $24 (direct materials) + $10 (direct labor) + $8 (variable factory overhead) + $18 (fixed factory overhead) = $60. For the 1,000 units produced during overtime, there's an additional $8 per unit for the overtime premium, making their cost $68 each. The average cost for 2,000 units, considering the overtime premium for half of them, is $64 per unit ($60 for the first 1,000 units and $68 for the second 1,000 units). Selling them at $48 per unit results in a loss per unit, but since the fixed costs are sunk and would be incurred regardless of the order, they should not be considered in the incremental analysis for the special order. The relevant costs are the direct materials, direct labor, variable factory overhead, and the overtime premium for half the units. Thus, the cost for the special order is $24 + $10 + $8 = $42 for regular time production and $42 + $8 = $50 for overtime production. The average cost per unit is $46 ($42 for the first 1,000 units and $50 for the second 1,000 units). Selling at $48 per unit, the profit per unit is $2. For 2,000 units, this results in a $4,000 profit.

Albatross Products Had the Following Unit Costs A One-Time Customer Has Offered to Buy 2,000 Units at r