Question

Fairmount Travel Gear produces backpacks and sells them to vendors who sell them under their own label. The cost of one of its backpacks follows. Materials Labor Variable overhead Pixed overhead ($405,000 per year; 45,000 units per year) Total $27.00 18.00 7.50 9.00 $61.50 Riverside Discount Mart, a chain of low-price stores, has asked Fairmount to supply it with 3,000 backpacks for a special promotion Riverside is planning. Riverside has offered to pay Fairmount a unit price of $63 per pack. The regular selling price is $90. The special order would require some modification to the basic model. These modifications would add $6.00 per unit in material cost, $2.50 per unit in labor cost, and $0.70 in variable overhead cost. Although Fairmount has the capacity to produce the 3,000 units without affecting its regular production of 45,000 units, a one-time rental of special testing equipment to meet Riverside's requirements would be needed. The equipment rental would be $7,500 and would allow Fairmount to test up to 5,000 units. Required: a. Prepare a schedule to show the impact of filling the Riverside order on Fairmont's profits for the year. b. Do you agree with the decision to accept the special order? c. Considering only profit, determine the minimum quantity of backpacks in the special order that would make it profitable. Complete this question by entering your answers in the tabs below. Required A Required B Required Prepare a schedule to show the impact of filling the Riverside order on Fairmont's profits for the year. (Enter your answers in thousands rounded to 1 decimal place. (.e., 5,400,400 should be entered as 5,400.4). Select option "higher or lower keeping Status Quo as the base. Select "none" if there is no effect.) (All Costs in Thousands of Dollars) Status Os Alternative

Answer 1

A)

	(All costs in thousands of dollars)
	Status Quo 45000 Units	Alternative 48000 Units	Difference
Sales revenue	$4050	$4239	$189	higher
Less: Variable costs:
Materials	1215	1314	99	higher
Labor	810	871.5	61.5	higher
Variable overhead	337.5	362.1	24.6	higher
Total variable cost	2362.5	2547.6	185.1	higher
Contribution margin	1687.5	1691.4	3.9	higher
Less: Fixed costs	405	412.5	7.5	higher
Operating profit (loss)	$1282.5	$1278.9	$3.6	lower

Sales revenue of Status Quo= 45*$90= $4050

Sales revenue of Alternative= (45*$90)+(3*$63)= $4239

Materials of Status Quo= 45*$27= $1215

Materials of Alternative= (45*$27)+($27+6)*3= $1314

Labor of Status Quo= 45*$18= $810

Labor of Alternative= (45*$18)+($18+2.50)*3= $871.5

Variable overhead of Status Quo= 45*$7.50= $337.5

Variable overhead of Alternative= (45*$7.50)+($7.50+0.70)*3= $362.1

Fixed cost of Alternative= $405+7.5= $412.5

b) No, the special order should not be accepted as the operating profit decreases when the special order is accepted.

c) Sales revenue for the special order= $63

Variable cost for the special order= $27+6+18+2.50+7.50+0.70= $61.7

Contribution margin for special order= $63.0-61.7= $1.30

The minimum quantity of backpacks= Fixed cost for the special order/Contribution margin for special order

= $7500/1.30= 5769 units