Black Horse Corporation manufactures a product with the following full unit costs at a volume of 2000 units:

Direct Materials $100
Direct Labor $40
Manufacturing Overhead (30% variable) $75
Selling expenses (50% variable) $25
Administrative expenses (10% variable) $40
Total Per unit $280

A company recently approached Black Horse’s management with an offer to purchase 225 units for $275 each. Black horse currently sells the product to dealers for $400 each. Black horse’s capacity is sufficient to produce the extra 225 units. No selling expenses would be incurred on the special order.

If Black Horse's management accepts the offer, profits will: Select one:

A. Increase by $33,40.
B. Decrease by $24,412.50
C. Decrease by $60,000
D. Increase by $24,412.50 Check

D. Increase by $24,412.50

Explanation:

If Black Horse's management accepts the offer, the company can save the following relevant costs for each unit -

Direct materials                                        = $100

Direct Labor                                              =  $40

Manufacturing overhead (75*30%)         =  $22.50

Administrative expenses (40*10%)          =  $4              

Total relevant costs save if accept offers = $166.50

Profit if accept offers for each unit = $275 - $166.50

Profit = $108.50

Total profit increases if the company accepts the offer = $108.50 × 225 units

= $24,412.50.

Therefore, the company's profit will increase by $24,412.50.

a. primarily outdoors, responding to emergencies and protecting people.

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