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The Elite Corporation: Calculate the change in total profit

The Elite Corporation usually manufactures towels for the retail department store industry. It is considering whether or not to accept a special order on terms which differ from its normal pricing policy.

The firm is highly automated and has a maximum production capacity of 40,000 towels per month and its actual current production is 40,000 towels per month. Its expected cost per unit for the current month without accepting the special order is:

Direct Materials $ 6
` Direct Labor 5
Variable manufacturing overhead 2
Fixed manufacturing overhead 6
Cost per unit $ 19

The fixed manufacturing overhead cost per unit is calculated as follows: (Budget total fixed overhead per month of $ 240,000 divided by actual current production of 40,000 towels per month).

Marketing and Administrative Information:

Regular selling price per towel $ 30
Variable selling costs per towel 2
Fixed selling costs per month $300,000

Elite has the chance to sell 10,000 towels to a luxury hotel chain for a special one-time-only price of $12 per towel. Because this is a special order the Elite Corporation will avoid the variable selling costs per towel.

REQUIRED:

a) Calculate the change in total profit if the accepts the special order.

b) Are there other issues besides the change in total profit which the Elite Corporation should consider when deciding whether or not to accept the special order? Discuss.

Solution Preview

a) Calculate the change in total profit if the accepts the special order.

Current contribution margin per unit = $30 - ($19 + $2) = $9
Current total profit = 40,000 x $9 - $300,000 = $60,000
New Profit = regular units ...

$2.19