Boone Products had the following unit costs: 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 or loss will be generated by accepting the special order?
A) $30,000 loss
B) $4,000 loss
C) $24,000 loss
D) $4,000 profit

Question

Boone Products had the following unit costs:  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 or loss will be generated by accepting the special order?
A) $30,000 loss 
B) $4,000 loss 
C) $24,000 loss 
D) $4,000 profit

Quizplus · Accepted Answer

The normal unit cost is calculated as follows:

Direct Materials: $18 
Direct Labor: $15 
Variable Overhead: $6 
Fixed Overhead: $8 
Total Unit Cost: $47

The customer is offering $48 per unit, which means a profit of only $1 per unit.

However, since 1,000 units need to be produced during overtime, an additional $8 per unit in premium will be incurred. This brings the total unit cost to $55.

Revenue from selling 2,000 units at $48 per unit: $96,000 
Total Cost of producing 2,000 units (1000 regular + 1000 overtime): $110,000

Total loss: $14,000

However, since the special order is only for 2,000 units and Boone Products has excess capacity, the company will not incur any opportunity cost for accepting this order. Therefore, any revenue generated from this order will be incremental revenue and contribute to profits.

Additional profit from accepting the special order:

Incremental revenue from selling 2,000 units: $2,000 
Overtime premium cost for producing 1,000 units: -$8,000

Total additional profit: -$6,000

This means that Boone Products will incur a loss of $6,000 by accepting the special order. Therefore, the answer is D ($4,000 profit) is incorrect, and the best answer is D ($6,000 loss).

Boone Products Had the Following Unit Costs: a One-Time