The Bharu Violin Company has the capacity to manufacture and sell 5,000 violins each year but is currently only manufacturing and selling 4,800. The following per unit numbers relate to annual operations at 4,800 units:
Per Violin
Selling price $600
Manufacturing costs:
Variable $130
Fixed $270
Selling and administrative costs:
Variable $20
Fixed $40
Woolgar Symphony Orchestra is interested in purchasing Bharu's excess capacity of 200 units but only if they can get the violins for $350 each. This special order would not affect regular sales or the cost structure above.
1. If the special order from Woolgar Symphony Orchestra is accepted, Bharu's profits for the year will:
A) increase by $40,000
B) decrease by $10,000
C) decrease by $22,000
D) decrease by $28,000
2. Assume that Bharu is manufacturing and selling at capacity (5,000 units). Any special order will mean a loss of regular sales. Under these conditions if the special order from Woolgar Symphony Orchestra is accepted, Bharu's profits for the year will decrease by:
A) $20,000
B) $22,000
C) $28,000
D) $50,000
