Question

Sherene Nili manages a company that produces wedding gowns. She produces both a custom product that is made to order and a standard product that is sold in bridal salons. Her accountant prepared the following forecasted income statement for March, which is a busy month:

	Custom Dresses			Standard Dresses			Total
Number of dresses		10			20			30
Sales revenue	$	47,500		$	27,500		$	75,000
Materials	$	9,500		$	7,500		$	17,000
Labor		19,500			8,500			28,000
Machine depreciation		550			250			800
Rent		3,700			2,300			6,000
Heat and light		1,000			600			1,600
Other production costs								2,300
Marketing and administration								7,200
Total costs							$	62,900
Operating profit							$	12,100

Ms. Nili already has orders for the 10 custom dresses reflected in the March forecasted income statement. The depreciation charges are for machines used in the respective product lines. Machines depreciate at the rate of $1 per hour based on hours used, so these are variable costs. In March, cutting and sewing machines are expected to operate for 800 hours, of which 550 hours will be used to make custom dresses. The rent is for the building space, which has been leased for several years at $6,000 per month. The rent, heat, and light are allocated to the product lines based on the amount of floor space occupied.

A valued customer, who is a wedding consultant, has asked Ms. Nili for a special favor. This customer has a client who wants to get married in early April. Ms. Nili's company is working at capacity and would have to give up some other business to make this dress. She can't renege on custom orders already agreed to, but she can reduce the number of standard dresses produced in March to 10. Ms. Nili would lose permanently the opportunity to make up the lost production of standard dresses because she has no unused capacity for the foreseeable future. The customer is willing to pay $22,900 for the special order. Materials and labor for the order will cost $5,500 and $9,500, respectively. The special order would require 115 hours of machine time. Ms. Nili's company would save 125 hours of machine time from the standard dress business given up. Rent, heat and light, and other production costs would not be affected by the special order.

Required:

a-1. Calculate the differential operating profit (loss). (Select option "increase" or "decrease", keeping Without special order as the base. Select "none" if there is no effect.)

Without Special Order With Special Order Impact Revenue Materials Labor Machine depreciation Contribution margin Rent Heat and light Other production costs Marketing and administration Operating profit (loss)

a-2. From an operating profit (loss) perspective for March, should Ms. Nili accept the order?

	Yes
	No

b. What is the minimum price Ms. Nili should accept to take the special order?

Minimum price

Answer 1

a-1. Calculate the differential operating profit (loss). (Select option "increase" or "decrease", keeping Without special order as the base. Select "none" if there is no effect.)
	Without Special Order	With Special Order	Impact
Revenue	$ 75,000.00	$      88,750.00	$ 13,750.00	Increase
Materials	$ 17,000.00	$      20,750.00	$   3,750.00	Increase
Labor	$ 28,000.00	$      32,250.00	$   4,250.00	Increase
Machine depreciation	$      800.00	$           790.00	$        10.00	Decrease
Contribution margin	$ 29,200.00	$      34,960.00	$   5,760.00	Increase
Rent	$   6,000.00	$        6,000.00	$              -	None
Heat and light	$   1,600.00	$        1,600.00	$              -	None
Other production costs	$   2,300.00	$        2,300.00	$              -	None
Marketing and administration	$   7,200.00	$        7,200.00	$              -	None
Operating profit (loss)	$ 12,100.00	$      17,860.00	$   5,760.00	Increase
a-2. From an operating profit (loss) perspective for March, should Ms. Nili accept the order?
Yes
Based on profit, Ms. Nili should accept the special order.
b. What is the minimum price Ms. Nili should accept to take the special order?
Minimum price	$ 17,140.00
The minumum price that would still provide lead to a (zero) incremental profit is $22,900 − $5760=	$ 17,140.00

A В C D E Total 2 Custom Dresses Standard Dresses Number of dresses 3 10 20 30 4 Sales revenue $ 47500 27500 75000 $ 5 Materials 9500 7500 17000 6 Labor 19500 8500 28000 7 Machine depreciation 550 250 800 6000 8 Rent 3700 2300 Heat and light 9 1000 600 1600 10 Other production costs 2300 7200 11 Marketing and administration 12 Total costs 62900 13 Operating profit 14 Ms. Nili already has orders for the 10 custom dresses reflected in the March forecasted income stater 12100 15 A valued customer, who is a wedding consultant, has asked Ms. Nili for a special favor. This customer 16 Required: 17 a-1. Calculate the differential operating profit (loss). (Select option "increase" or "decrease", keeping EELI 18 Without Special Order With Special Order | B19+(C4/C3) 10 B20+(C5/C3) 10 -B21+(С6/с3)*10 B22-(125-115) C19-SUM(C20:C22) Impact 19 Revenue D4 -C19- B19 Increase 20 Materials -D5 -C20- B20 Increase 21 Labor -C21 - B21 Increase D6 22 Machine depreciation -В22-С22 -D7 Decrease 23 Contribution margin -В19-SUM(B20:B22) %3DС23-B23 Increase 24 Rent -D8 -B24 %3DВ24-C24 None 25 Heat and light 26 Other production costs -D9 -B25 -В25-C25 None =D10 -B26 -В26-C26 None 27 Marketing and administration 28 Operating profit (loss) -D11 -B27 -B27-C27 None C23-SUM (C24:C27) B23-SUM(B24:B27) D23-SUM(D24:D27) Increase 29 30 a-2. From an operating profit (loss) perspective for March, should Ms. Nili accept the order? 31 Yes 32 Based on profit, Ms. Nili should accept the special order 33 b. What is the minimum price Ms. Nili should accept to take the special order? 34 Minimum price -B35