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    amyturner166's Avatar
    amyturner166 Posts: 2, Reputation: 1
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    #1

    Apr 1, 2009, 01:20 PM
    Trying to figure out the amount a company's net operating income will increase or dec
    A company manufactures batons. If the company can manufacture 300000 batons a year at a variable cost of $750000 and a fixed cost of $450,000. Base on next year's predictions 240000 batons will be sold at 5.00 each. A special order is placed for 60,000 batons to be solf at a 40% discount off the regular price. Total fixed costs would be unaffected by this order. By what amount would the company's net operating income be increased or decreased as a result of the special order
    helemuo's Avatar
    helemuo Posts: 19, Reputation: 1
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    #2

    Apr 1, 2009, 07:24 PM
    Profit will increase by $30,000 as follows:
    Units to manufacture=300,000. Variable Cost (VC) is $750,000. Variable cost per unit
    is $750,000/300,000=$2.5. Fixed cost is $450,000. Average fixed per unit=$1.5 Total cost per unit is at $4 (2.5+1.5) making a profit of $1 per baton.
    Regular sale of 300,000 batons will generate $300,000 profit,
    Total selling price of the special order is reduced by 40%=40%x$5=$3
    Because the fixed cost remain constant, the only expense to worry about in this special order is the variable cost of $2.5. Therefore $(3-2.5)=$0.50 profit per order
    60,000 x0.5=$30,000 additional increase in profit.
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    helemuo Posts: 19, Reputation: 1
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    #3

    Apr 1, 2009, 07:32 PM

    slight correction. Regular sale is projected at 240,000 x $1= $240,000 profit. Additional increase $(240,000 +30,000)=$270,000

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