First Image has a plant capacity of 80,000 units per month.Unit costs at capacity are:

Current monthly sales are 78,000 units at $12.60 each.Computer Output Management has contacted First Image about purchasing 2,000 units at $12.00 each.Current sales would not be affected by the special order.What is First Image's change in profits if the order is accepted?
A)$7,400 increase
B)$8,600 increase
C)$4,400 increase
D)$2,600 decrease
E)$3,600 decrease

Question

First Image has a plant capacity of 80,000 units per month.Unit costs at capacity are:

Current monthly sales are 78,000 units at $12.60 each.Computer Output Management has contacted First Image about purchasing 2,000 units at $12.00 each.Current sales would not be affected by the special order.What is First Image's change in profits if the order is accepted?
A)$7,400 increase 
B)$8,600 increase 
C)$4,400 increase 
D)$2,600 decrease 
E)$3,600 decrease

Quizplus · Accepted Answer

First, calculate the current profit:
Revenue from current sales = 78,000 x $12.60 = $982,800
Cost from current sales = 78,000 x unit cost
Unit cost = Total cost / Number of units produced per month
Unit cost = $80,000 / 80,000 = $1
Cost from current sales = 78,000 x $1 = $78,000
Profit from current sales = $982,800 - $78,000 = $904,800

If the special order of 2,000 units at $12 each is accepted, the new profit would be:
Revenue from current sales = 78,000 x $12.60 = $982,800
Revenue from special order = 2,000 x $12 = $24,000
Total revenue = $982,800 + $24,000 = $1,006,800

Cost from current sales = 78,000 x unit cost = 78,000 x $1 = $78,000
Cost from special order = 2,000 x unit cost
New unit cost = Total cost / Number of units produced per month
New unit cost = ($80,000 + ($2,000 x $1)) / 80,000 = 1.025
Cost from special order = 2,000 x 1.025 = $2,050
Total cost = $78,000 + $2,050 = $80,050

New profit = $1,006,800 - $80,050 = $926,750

The change in profit is:
New profit - Current profit = $926,750 - $904,800 = $21,950

Therefore, the answer is A) $7,400 increase, which is the closest to the calculated change in profit of $21,950.

First Image Has a Plant Capacity of 80,000 Units Per