The David Corp. makes and sells 50,000 suitcases each year. The total fixed costs are $1,000,000. It has variable labor costs of $25 per unit; direct materials costs of $40 per unit; and variable overhead costs of $15 per unit. Its normal selling price is $120 per item. Assuming it does not have a capacity problem, what would be the effect on profits of accepting a special order of 10,000 suitcases, at a price of $90 per suitcase?

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Quizplus · Accepted Answer

The variable costs per unit are $25 (labor) + $40 (materials) + $15 (overhead) = $80. Selling at $90 per suitcase gives a $10 profit per unit on the special order. For 10,000 suitcases, this results in a $100,000 increase in profits. Fixed costs are not affected by the special order.