The Buchanan Company has gathered the following information for a unit of its most popular product: The above cost information is based on 10,000 units.A distributor has offered to buy 2,000 units at a price of $32 per unit.The distributor claims this special order would not disturb regular sales at $42.Special packaging and other selling expenses would be an additional $0.50 per unit for the special order.How many units of regular sales could be lost before this contract is not profitable?
A)0 units.
B)950 units.
C)1,000 units.
D)2,000 units.

Question

The Buchanan Company has gathered the following information for a unit of its most popular product:  The above cost information is based on 10,000 units.A distributor has offered to buy 2,000 units at a price of $32 per unit.The distributor claims this special order would not disturb regular sales at $42.Special packaging and other selling expenses would be an additional $0.50 per unit for the special order.How many units of regular sales could be lost before this contract is not profitable?
A)0 units. 
B)950 units. 
C)1,000 units. 
D)2,000 units.

Quizplus · Accepted Answer

First, let's calculate the total cost of the special order:
Variable cost per unit = $10 + $2 + $1 = $13
Total cost of 2,000 units = $13 * 2,000 = $26,000

Revenue from the special order = $32 * 2,000 = $64,000

Total profit from the special order = Revenue - Total cost = $64,000 - $26,000 = $38,000

Now, let's calculate how many units of regular sales could be lost before the contract is not profitable.

We know that the selling price of regular units is $42 and the variable cost per unit is $13. That means the contribution margin per unit is $29 ($42 - $13).

To make up for the profit loss from selling 2,000 units at a lower price, we need to sell enough regular units to cover the profit loss of $38,000.

Profit loss per regular unit = Contribution margin per unit - Variable cost per unit = $29 - $13 = $16

Number of regular units required to cover the profit loss = $38,000 / $16 = 2,375

Therefore, if we lose more than 2,375 regular units, then the contract will not be profitable.

Number of regular units that can be lost before the contract is not profitable = 2,375 - 2,000 = 375

We can also check this answer by calculating the total profit from selling 2,375 regular units:

Revenue from selling 2,375 regular units = $42 * 2,375 = $99,750

Total cost of 2,375 regular units = $10 * 2,375 = $23,750

Total profit from selling 2,375 regular units = Revenue - Total cost = $99,750 - $23,750 = $76,000

Now, we add the profit from the special order to this to get the total profit:

Total profit = $76,000 + $38,000 = $114,000

As long as we lose less than 375 units of regular sales, we will still make a profit. Therefore, the best choice is B) 950 units.

The Buchanan Company Has Gathered the Following Information for a Unit