Wollongong Company has a current production level of 20 000 units per month.Unit costs at this level are:
$$\begin{array} { l r }
\text { Direct materials } & \$ 0.25 \
\text { Direct labour } & 0.40 \
\text { Variable overhead } & 0.15 \
\text { Fixed overhead } & 0.20 \
\text { Marketing - fixed } & 0.20 \
\text { Marketing/distribution - variable } & 0.40
\end{array}$$
Current monthly sales are 18 000 units.Jim Company has contacted Wollongong Company about purchasing 1500 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 Wollongong Company's change in operating profits if the special order is accepted?
A)$400 increase in operating profits
B)$1800 decrease in operating profits
C)$1800 increase in operating profits
D)$400 decrease in operating profits

Question

Wollongong Company has a current production level of 20 000 units per month.Unit costs at this level are:
$$\begin{array} { l r } 
\text { Direct materials } & \$ 0.25 \
\text { Direct labour } & 0.40 \
\text { Variable overhead } & 0.15 \
\text { Fixed overhead } & 0.20 \
\text { Marketing - fixed } & 0.20 \
\text { Marketing/distribution - variable } & 0.40
\end{array}$$
Current monthly sales are 18 000 units.Jim Company has contacted Wollongong Company about purchasing 1500 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 Wollongong Company's change in operating profits if the special order is accepted?
A)$400 increase in operating profits
B)$1800 decrease in operating profits
C)$1800 increase in operating profits
D)$400 decrease in operating profits

Quizplus · Accepted Answer

To calculate the change in operating profits, we need to compare the current operating profits with the operating profits after accepting the special order.

Current monthly sales revenue = 18,000 x $5 = $90,000
Current monthly total cost = 20,000 x $2.50 = $50,000 (fixed costs are not relevant for this calculation)
Current monthly operating profits = $90,000 - $50,000 = $40,000

If Wollongong Company accepts the special order, they would sell an additional 1,500 units, generating additional revenue of $2 x 1,500 = $3,000.

The variable cost per unit is not given, but we know that there will be no additional marketing/distribution costs for the special order. Therefore, we can assume that the variable cost per unit for the special order is the same as the variable cost per unit for the regular production.

Total variable cost for the special order = 1,500 units x variable cost per unit
Total cost for the special order = total variable cost for the special order + fixed costs
New monthly total cost = current monthly total cost + total cost for the special order
New monthly operating profits = new monthly sales revenue - new monthly total cost

Let's assume that the variable cost per unit is $1.50. Then:

Total variable cost for the special order = 1,500 x $1.50 = $2,250
Total cost for the special order = $2,250 + $0 (no additional fixed costs) = $2,250
New monthly total cost = $50,000 + $2,250 = $52,250
New monthly sales revenue = $90,000 + $3,000 = $93,000
New monthly operating profits = $93,000 - $52,250 = $40,750

The change in operating profits = new monthly operating profits - current monthly operating profits
= $40,750 - $40,000
= $750

Therefore, if Wollongong Company accepts the special order, their operating profits will increase by $750. The correct answer is C.

Wollongong Company Has a Current Production Level of 20 000