Goodstone Tire Corporation sells tires for $90 each. Per-unit costs associated with producing and selling the tires are: Direct materials $35 Direct labor 10 Factory overhead 20 The variable portion of the factory overhead is $8 per unit. A foreign company wants to purchase 1,000 tires for $65 each. Assuming that Goodstone has no excess capacity, .a. the incremental profit from the special order will be $12,000.b. the incremental loss from the special order will be $25,000.c. there will be no incremental profit or loss from the special order.

The correct answer is B)

There will be incremental loss of $ 25,000.

Explanation:

Incremental profit is the profit gain or loss associated with a given managerial decision.

In the question above the following are given:

Price = $90

Per Unit Cost (PUC) = Cost of Direct Material + Cost of Direct Labour + Factory Overhead + Factory Overhead)

PUC = 35+10+20+8

PUC = $73

At the above, Profit Per Unit (PPU)= $90-$73

= $17

Given that there is a variable overhead component the cost of production to the tune of $8, Producing at a cost less $8 gives the total PUC at $65

Therefore if the foreign company buys at this price, the incremental loss comes to

($90-$65) x 1000

= $25,000

Cheers!

a. the incremental profit from the special order will be $12,000

Explanation:

The revenue per tire is $65

The cost per unit tire = direct materials + direct labor + variable overhead

The cost per unit tire = $35 + $10 + $8 = $53

Money each tire would generate = $65 - $53 = $12

Since there are a total of 1000 tires, the total money that Goodstone would generate = $12 × 1000 = $12000.

Since Goodstone has no excess capacity, there would be an incremental profit from special order of $12000

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