The Good Tyre Company has been offered a oneyear contract fo

The Good Tyre Company has been offered a one-year contract for 30,000 additional tires at a unit sales price of $23. Because the purchaser is to attach its own trade name to the tyres , the Good Tyre Company\'s normal sales price of $50 per tyre and present sales volume will not be affected. The unit cost information per tyre is as follows: Direct materials $10 Direct labor $4 Variable overhead $6 Fixed overhead $ 5 Total unit cost $25 Assuming total fixed costs will remain constant, the profit increase or decrease from accepting the special order for 30,000 tires is a:

Select one: a. $90,000 increase b. $270,000 increase c. $30,000 decrease d. $60,000 decrease

Solution

Total variable cost. = $20 .( 10+4+6)

Total fixed cost. = $5

Normal selling price = $50

Contact price. =$23

Number of orders. = 30,000

Note:-

For accepting the special order you should not consider the fixed cost. So, consider the values of variable cost and contact prices.

Therefore, Net profit= contact price- variable cost

Net profit= $23-$20

Net profit= $3

Number of orders= 30,000

Therefore, total net profit will increase by$90,000 (30000*$3)