Santana & Co produces widgets. They have a capacity to produce 50,000 widgets/year and currently sell 45000 widgets/year. They sell these widgets for $200. Each widget costs Santana & Co $80 to make. Their fixed costs are $900,000/year.

Penultimo LLC Have approached Santana & Co and want to order 8000 widgets. They have offered to buy them for $150 each, however have requested customizations which will increase variable costs by $10/widget. Santana will also need to purchase a new engraving machine costing $30,000 to perform the requested customizations.

a) If Santana & Co accept this special order, what will be the profit/loss from the order?

Step 1 Calculate Contribution Margins (Normal & Special Order)

CM = SP VC

CMn = $200 $80 = $120

CMso = $150 $80 $10 = $60

Step 2 Opportunity Quantity

Available Capacity = 5000 units

Special Order Quantity = 8000 units

Opportunity Quantity = 3000 units

Step 3 Calculate Opportunity Cost

Opportunity cost = opportunity quantity x CMn

= 3000 x 120

= $360,000

Step 4 Calculate incremental gain / loss from special order

Revenue from Special Order (150 x 8000)	= $1200000	OR	CM of Special Order (60 x 8000)	= $480,000
Less: VC Special Order (90 x 8000)	= $720,000		Less: Opportunity Cost	= $360,000
Less: Opportunity Cost	= $360,000		Less: Additional Fixed Costs	= $30,000 .
Less: Additional Fixed Costs	= $30,000 .		Incremental Gain / Loss	= $90,000
Incremental Gain / Loss	= $90,000

Step 5 Conclusion

Accepting the special order will result in an additional profit of $90,000.

b) If Penultimo LLC wanted to order 11000 widgets, what will be the profit/loss from the order?

Step 1 Calculate Contribution Margins (Normal & Special Order)

CM = SP VC

CMn = $200 $80 = $120

CMso = $150 $80 $10 = $60

Step 2 Opportunity Quantity

Available Capacity = 5000 units

Special Order Quantity = 11000 units

Opportunity Quantity = 6000 units

Step 3 Calculate Opportunity Cost

Opportunity cost = opportunity quantity x CMn

= 6000 x 120

= $720,000

Step 4 Calculate incremental gain / loss from special order

Revenue from Special Order(150 x 11000)	= $1650000	OR	CM of Special Order (60 x 11000)	= $660,000
Less: VC Special Order (90 x 11000)	= $990,000		Less: Opportunity Cost	= $720,000
Less: Opportunity Cost	= $720,000		Less: Additional Fixed Costs	= $30,000 .
Less: Additional Fixed Costs	= $30,000 .		Incremental Gain / Loss	= ($90,000)
Incremental Gain / Loss	= ($90,000)

Step 5 Conclusion

Accepting the special order will result in a loss of $90,000.