Walnut has received a special order for 2,000 units of its product at a special price of $270.The product normally sells for $360 and has the following manufacturing costs: Walnut is currently operating at full capacity and cannot fill the order without harming normal production and sales.If Walnut accepts the order,what effect will the order have on the company's short-term profit?

A)$108,000 decrease
B)$108,000 increase
C)$180,000 decrease
D)zero

Question

Walnut has received a special order for 2,000 units of its product at a special price of $270.The product normally sells for $360 and has the following manufacturing costs: Walnut is currently operating at full capacity and cannot fill the order without harming normal production and sales.If Walnut accepts the order,what effect will the order have on the company's short-term profit?

A)$108,000 decrease 
B)$108,000 increase 
C)$180,000 decrease 
D)zero

Quizplus · Accepted Answer

If Walnut accepts the order, it will need to divert resources from its normal production, which will result in a decrease in normal sales revenue. The total revenue from accepting the special order will be $540,000 ($270 per unit × 2,000 units), but the total cost of manufacturing the units will be $600,000 ($300 per unit × 2,000 units). This will result in a loss of $60,000. Additionally, because the product normally sells for $360 and is now being sold for $270, the company is losing $90 per unit ($360 - $270) on the special order. Thus, the total loss to the company will be $180,000 ($90 loss per unit × 2,000 units). Therefore, the effect on the company's short-term profit will be a decrease of $180,000.

Walnut Has Received a Special Order for 2,000 Units of Its