Harcourt Manufacturing (HM) has the capacity to produce 10,000 fax machines per year. HM currently produces and sells 7,000 units per year. The fax machines normally sell for $100 each. Modem Products has offered to buy 2,000 fax machines from HM for $60 each. Unit-level costs associated with manufacturing the fax machines are $15 each for direct labor and $40 each for direct materials. Product-level and facility-level costs are $50,000 and $65,000, respectively. How much would profit increase (decrease) if HM accepted this special order?

$10,000

$112,000

$10,000

$112,000

Increase by $10,000

Explanation:

Calculating current profit

Sales = 7,000 units X $100 = $700,000

Less: Variable Cost, Direct labor $15 + Direct material $40 = $55 each unit

= $7,000 X $55 = $385,000

Less: Fixed Cost = Product level $65,000 + Facility Level = $50,000 = $115,000

Total profit = $700,000 - $385,000 - $115,000 = $200,000

Since the entire production capacity is for 10,000 units and only 7,000 units are produced additional production of 2,000 units is within the limit and will not require additional fixed cost.

Thus profit on sale of these 2,000 units

Sales value = 2,000 X $60 = $120,000

Less: Variable cost per unit of $55 = 2,000 X $55 = $110,000

Profit on these 2,000 units = $120,000 - $110,000 = $10,000

This concludes that profit will increase by $10,000 with this order of 2,000 units.