Question

Wilson company normally produces 20,000 tennis rackets per year, but has enough capacity to produce 25,000. A customer has requested a special order of 2,000 Wilson tennis rackets for $40 per unit. The normal selling price is $50. Costs related to the special order are $30 per racket plus $11,000 for requested modifications to the special order rackets. Wilson incurred $50,000 of costs to design the racket and has $100,000 of allocated general overhead costs per year. What is the financial advantage or disadvantage of accepting the order?

Multiple choice question.

$9,000 disadvantage


$29,000 disadvantage


$29,000 advantage


$9,000 advantage

Answer 1

To determine whether accepting the special order is advantageous or disadvantageous for Wilson company, we need to evaluate the additional costs and revenues associated with the special order.

1. **Sales Revenue from the Special Order**:
\[
\text{Revenue} = \text{Selling Price} \times \text{Number of Rackets} = 40 \times 2,000 = 80,000
\]

2. **Variable Costs of the Special Order**:
- Cost per racket is $30.
- Total variable cost for 2,000 rackets:
\[
\text{Variable Costs} = \text{Cost per Racket} \times \text{Number of Rackets} = 30 \times 2,000 = 60,000
\]
- Plus additional modification costs of $11,000.
\[
\text{Total Costs} = 60,000 + 11,000 = 71,000
\]

3. **Contribution Margin from the Special Order**:
- Contribution margin is calculated by subtracting total costs from sales revenue.
\[
\text{Contribution Margin} = \text{Revenue} - \text{Total Costs} = 80,000 - 71,000 = 9,000
\]

4. **Conclusion**:
- Since the contribution margin from the special order is a positive $9,000, accepting the order would result in a **financial advantage** of $9,000.

Therefore, the answer to the question is:

**$9,000 advantage**.