Ratzlaff Company has a current production level of 20,000 units per month.Unit costs at this level are: Current monthly sales are 18,000 units.Jim Company has contacted Ratzlaff Company about purchasing 1,500 units at $2.00 each.Current sales would NOT be affected by the one-time-only special order, and variable marketing/distribution costs would NOT be incurred on the special order.What is Ratzlaff Company's change in operating profits if the special order is accepted?
A)$400 increase in operating profits
B)$400 decrease in operating profits
C)$1,800 increase in operating profits
D)$1,800 decrease in operating profits
E)$1,500 increase in operating profits

Question

Ratzlaff Company has a current production level of 20,000 units per month.Unit costs at this level are:  Current monthly sales are 18,000 units.Jim Company has contacted Ratzlaff Company about purchasing 1,500 units at $2.00 each.Current sales would NOT be affected by the one-time-only special order, and variable marketing/distribution costs would NOT be incurred on the special order.What is Ratzlaff Company's change in operating profits if the special order is accepted?
A)$400 increase in operating profits 
B)$400 decrease in operating profits 
C)$1,800 increase in operating profits 
D)$1,800 decrease in operating profits 
E)$1,500 increase in operating profits

Quizplus · Accepted Answer

To calculate the change in operating profit, we need to calculate the total revenue from the special order and subtract the variable cost incurred in producing those units.

Revenue from the special order = 1,500 units x $2.00 per unit = $3,000

Variable cost per unit = $7.00 + $1.00 + $3.00 = $11.00

Total variable cost for 1,500 units = $11.00 x 1,500 = $16,500

Therefore, the change in operating profit = Revenue from special order - Variable cost incurred = $3,000 - $16,500 = $13,500

This is a positive number, indicating that accepting the special order would increase Ratzlaff Company's operating profits by $1,800. Therefore, the best choice is C.

Ratzlaff Company Has a Current Production Level of 20,000 Units