Answer:
The annual financial advantage for the company as a result of accepting this special order from the City of Clearwater should be $144,000.
Explanation:
To know the net effect that this special order, we have to list all the differential cost that the company will incur for this additional sale.
The sell price is $75.
The fixed costs are not affected, so we will not include them in the calculation.
The variable manufacturing cost is $25/unit.
The variable selling and administrative cost for this special order are $2/unit.
There are no other cost affected for the acceptance of this order.
Then, the contribution margin of this special order (3,000 units) is:
[tex]CM=Q\cdot(Price-Costs)=3,000*(75-(25+2))=3,000*48\\\\CM=144,000[/tex]
The annual financial advantage for the company as a result of accepting this special order from the City of Clearwater should be $144,000.
The contribution margin is the part of sales revenue that is consumed towards the variable cost incurred for selling those products. The contribution margin is determined by deducting all the variable costs from the sales revenues. It does not consider the fixed costs incurred over the goods.
The annual financial advantage of the company that is resulting due to the acceptance of the special order should be $144,000.
The net effect of the special order is determined by computing the contribution margin of the additional sales.
The contribution margin is computed in the image attached below.
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