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The Effect on Net Income of a Special Order

A company manufactures a product. The company can manufacture 1,200,000 units a year at a variable cost of $3,000,000 and a fixed cost of $1,800,000. Based on projections for next year, 960,000 units will be sold at the regular price of $20.00 each. A special order has been received for 240,000 units to be sold at a 70% discount off the regular price. Total fixed costs would be unaffected by this order. By what amount would the company's net operating income be increased as a result of the special order?

Solution Preview

The basic cost-volume-profit formula is Sales revenue-Total variable costs-Total fixed costs=Net profit.
Further, Sales revenue-Total variable costs=Contribution Margin, or (sales volume*unit selling price)-(sales volume*unit variable cost)=contribution margin.
Factoring out sales volume, we find that Unit selling price-Unit variable costs=Unit ...

Solution Summary

A company manufactures a product. The company can manufacture 1,200,000 units a year at a variable cost of $3,000,000 and a fixed cost of $1,800,000. Based on projections for next year, 960,000 units will be sold at the regular price of $20.00 each. A special order has been received for 240,000 units to be sold at a 70% discount off the regular price. Total fixed costs would be unaffected by this order. By what amount would the company's net operating income be increased as a result of the special order?

$2.19