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 special order, they will have to accept a price of $270 per unit, which is $90 less than the normal selling price of $360 per unit. The manufacturing cost per unit is $200. Therefore, their contribution margin per unit would be $360 - $200 = $160 per unit.

For the special order of 2,000 units, the total revenue would be 2,000 x $270 = $540,000. The total manufacturing cost would be 2,000 x $200 = $400,000. Therefore, their contribution margin would be 2,000 x $160 = $320,000.

However, since the company is operating at full capacity, they would have to give up the opportunity to sell 2,000 units at the normal selling price of $360. This would result in a loss of contribution margin of 2,000 x ($360-$200) = $320,000. Therefore, the net effect on the company's short-term profit would be a decrease of $400,000 - $320,000 = $80,000.

In addition, accepting the special order may also harm normal production and sales, which could have long-term negative effects on the company's profitability. Therefore, the best choice is C ($180,000 decrease).

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