Bean Town Company currently produces and sells 12,000 units of its product each month at $15 each. Another firm has offered to buy an additional 1,000 units at $10 per unit. Bean Town's total cost per unit is as follows: Fixed overhead costs per unit are based on production of 12,000 units per month. Bean Town currently has the capacity to produce 15,000 units per month. By how much would profit change if Bean Town accepts this offer?

Additional Information:

Direct Material cost $3.00

Direct Labor Cost $1.5

Variable Overhead Cost $3.8

Fixed Cost $2.00

Answer:

Profit will increase by $1700

Explanation:

The total variable cost can be calculated using the following formula:

Prime cost = Direct Material cost + Direct Labor Cost + Variable Overhead Cost

By putting the values in the equation we have:

Prime Cost = $3 + $1.5 + $3.8 = $8.3

The new selling price for additional 1000 units is $10 and the contribution earned on this price is $1.7 per unit ($10 selling price - $8.3 Total Variable cost)

So

Net profit = Additional units Sold * Contribution earned on additional units

Net Profit = 1000 units * $1.7 = $1700

The net increase in Net profit would be $1700.