Missouri Company has a current production capacity level of 200,000 units per month. At this level of production, variable costs are $0.50 per unit and fixed costs are $0.50 per unit.Current monthly sales are 173,000 units.Gates Company has contacted Missouri Company about purchasing 20,000 units at $1.00 each.Current sales would not be affected by the special order and no additional fixed costs would be incurred on the special order.Missouri Company's change in profits if the order is accepted will be a _____:
A)$20,000 increase
B)$20,000 decrease
C)$10,000 increase
D)$10,000 decrease

Question

Quizplus · Accepted Answer

To calculate the change in profits, we need to compare the profit earned currently with the profit that will be earned if the special order is accepted.

Currently, Missouri Company's total revenue is:

173,000 units sold x $1.00 per unit = $173,000

Total variable costs are:

173,000 units sold x $0.50 per unit = $86,500

Total fixed costs are:

200,000 units capacity x $0.50 per unit = $100,000

Thus, current profit is:

$173,000 - $86,500 - $100,000 = -$13,500

If the special order is accepted, Missouri Company will produce and sell 20,000 extra units.

Total revenue from the special order will be:

20,000 units sold x $1.00 per unit = $20,000

Total variable costs for the special order will be:

20,000 units sold x $0.50 per unit = $10,000

Total fixed costs remain the same as there is no additional fixed cost for the special order.

Thus, the profit from the special order will be:

$20,000 - $10,000 - $100,000 = -$90,000

However, this calculation is not the change in profit. We need to deduct the loss or add the gain of special order to total profit to calculate the change in profit.

Therefore, the change in profit will be:

-$13,500 + (-$90,000) = -$103,500

Since the change in profit is negative, accepting the special order will decrease Missouri Company's profits. However, the decrease will only be by $10,000 (the profit loss of special order). Therefore, choice C is the best answer.

Missouri Company Has a Current Production Capacity Level of 200,000