Certified Specialist Of Spirits Practice Exam

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A company receives a special order for 1,000 units at $15 per unit. Normal selling price is $25. Variable manufacturing costs are $10 per unit, and variable selling costs (which will not apply to this order) are $3 per unit. Fixed overhead is $5 per unit. What is the financial advantage (disadvantage) of accepting the order assuming excess capacity?

$2,000 advantage $5,000 advantage $2,000 disadvantage $10,000 disadvantage

Correct Answer:

$5,000 advantage

Explanation:

Incremental revenue = $15. Incremental cost = $10 (variable manufacturing only). Incremental profit = $5 per unit. Total advantage = 1,000 units * $5 = $5,000.

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