Potter has received a special order for 10,000 units of its product at a special price of $24.The product normally sells for $32 and has the following manufacturing costs: Potter is currently operating at full capacity and cannot fill the order without harming normal production and sales.If Potter accepts the order,what effect will the order have on the company's short-term profit?
A)$64,000 decrease
B)$64,000 increase
C)$80,000 decrease
D)$16,000 increase

Question

Potter has received a special order for 10,000 units of its product at a special price of $24.The product normally sells for $32 and has the following manufacturing costs:  Potter is currently operating at full capacity and cannot fill the order without harming normal production and sales.If Potter accepts the order,what effect will the order have on the company's short-term profit?
A)$64,000 decrease 
B)$64,000 increase 
C)$80,000 decrease 
D)$16,000 increase

Quizplus · Accepted Answer

To determine the effect of accepting the special order on short-term profits, we need to calculate the incremental profit per unit of the special order compared to the regular selling price.

The incremental revenue per unit for the special order would be:

Special price - Regular price = $24 - $32 = -$8

This means that Potter would lose $8 in revenue per unit by accepting the special order.

The incremental manufacturing cost per unit for the special order would be:

Direct Material + Direct Labor + Variable Overhead = $6 + $4 + $1 = $11

Therefore, the incremental profit per unit for the special order would be:

(-$8) - $11 = -$19

This means that Potter would lose $19 in profit per unit by accepting the special order.

If Potter accepts the order for 10,000 units, the total incremental profit loss would be:

10,000 units x (-$19) = -$190,000

This represents a decrease in short-term profit of $190,000 compared to not accepting the special order.

However, the question asks for the effect on short-term profit only, so we need to compare the incremental profit loss to the profit that Potter would have made by not accepting the special order.

If Potter doesn't accept the special order, it would continue to sell its product at the regular price of $32 per unit, with a profit of:

$32 - $11 = $21 per unit

Therefore, the total profit without the special order would be:

10,000 units x $21 = $210,000

If Potter accepts the special order, it would make a total profit of:

$24 - $11 = $13 per unit

Therefore, the total profit with the special order would be:

10,000 units x $13 = $130,000

Comparing the two scenarios, we see that accepting the special order would result in a decrease in short-term profit of:

$210,000 - $130,000 = $80,000

Therefore, the best choice is C, as accepting the special order would result in a decrease in short-term profit of $80,000.

Potter Has Received a Special Order for 10,000 Units of Its