Reference no: EM132762915
ABC Corporation has a plant capacity of 100,000 units per month. Unit costs at capacity are:
Direct materials $4.00
Direct labor 6.00
Variable manufacturing overhead 3.00
Fixed manufacturing overhead 1.00
Fixed marketing costs 7.00
Variable marketing costs 5.00
Current monthly sales are 95,000 units at $30.00 each. XYZ Company has contacted ABC Corporation about purchasing 2,000 units at $24.00 each. XYZ wants (1) a higher grade of DM which would cost an additional $5/unit and (2) XYZ's name engraved on the 2,000 units which would require ABC to purchase of an engraving tool for $1,000. It should be noted that ABC would not incur variable marketing costs of $5/unit on the special order. Current sales would not be affected by the special order because of idle capacity.
Problem 1: What is ABC's change in operating profits if the special order is accepted?
a. $10,000 increase
b. $11,000 increase
c. $12,000 increase
d. $13,000 increase
Problem 2: Assume that current monthly sales are now 100,000 and, therefore, ABC Corporation is operating at full capacity. Calculate the Opportunity Cost of not selling 2,000 units to regular customers.
a. $21,000
b. $22,000
c. $23,000
d. $24,000
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