Question

1. Gabriela & Co. manufactures fancy bath towels in Boone, NC. The plant has a oduction capacity of 44,000 towels each month. Current monthly production is 30,000 towels. Per unit costs are as follows: Profit Income VC FC DM $6.50 DL 0.50 $1.50 Mftg Costs 1.50 3.50** Total $8.50 $5.00 + 2 (MKTG) Total fixed direct manufacturing labor is $45,000. Total fixed overhead is $105,000. Marketing costs per unit are $7.00 ($5 of which is variable). *$45,000/30,000 towels $1.50 per towel **$105,000/30,000 towels = $3.50 Mftg costs per towel A hotel in Puerto Rico has offered to buy 5,000 towels from Gabriela & Co. at $11.50 per Towel. No marketing costs will be incurred for this one-time-only special order. a. Should Gabriela & Co. accept this order? Support your answer with computations (Worth 2 pts.) Accept : 5000X11.50- 57500 b. What is the increase or decrease in net income if they accept the offer? (Worth 1 pt.) What is the CM per unit if they accept the offer? Support your answer with computations. (Worth 1 pt.)

Answer 1

Answer to a, b and c:

Question a: Total Variable Cost per unit = $8.50 per unit Selling price per unit = $11.50 per unit Since, the selling price per unit is higher than the total variable cost per unit, it will result in a incremental profit. Hence, Gabriel & Co. should accept this order. Note: We will not consider fixed cost of direct labor or fixed manufacturing cost in this incremental analysis, as no additional fixed overheads are being incurred to produce the units of special order. Question b: Increase in Net Income = (Selling price per unit - Variable cost per unit) X Number of units in special order Increase in Net Income = ($11.50 - $8.50) X 5,000 Increase in Net Income if offer is accepted = $15,000 Question c: Contribution margin per unit = Selling price per unit - Variable cost per unit Contribution margin per unit = $11.50 - $8.50 Contribution margin per unit = $3.00