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# problems about special order and maximizing profits

1. Gamboa's Company has a capacity of 50,000 units per year and is currently selling all 50,000 for \$500 each. Keller Company has approached Gamboa about buying 5,000 units for only \$450 each. Gamboa has a normal variable cost of \$380 per unit, including \$50 per unit in direct labor. Gamboa could produce the special order on an overtime shift. This would result in direct labor being paid overtime at 150% of the normal pay rate. Additionally, \$50,000 in additional fixed costs would be association with the order. What will be the impact on profits of accepting the order?
A. Profits would decrease \$350,000
B. Profits would increase \$350,000
C. Profits would increase \$175,000
D. Profits would increase \$225,000.

2 Strait Guitar Company sells a single product. Strait estimates demand and costs at various activity levels as follows:

Units Sold Price Total Variable costs Fixed Costs
120,000 \$48 \$3,000,000 \$1,000,000
140,000 \$45 \$3,500,000 \$1,000,000
160,000 \$40 \$4,000,000 \$1,000,000
180,000 \$35 \$4,500,000 \$1,000,000
200,000 \$30 \$5,000,000 \$1,000,000

What price should Strait charge to maximize profits?
A. \$48
B. \$45
C. \$40
D. \$35
E. \$30

#### Solution Summary

Classic problems!

\$2.19