Question

Business Decision Case The following total cost data are for Ralston Manufacturing Company,

which has a normal capacity per period of 400,000 units of product that sell for $18 each. For the

foreseeable future, regular sales volume should continue at normal capacity of production

Solution 6.1

y-intercept 5 Total fixed costs of $5.000

Slope 5 Variable cost per unit of approximately $0.50 per water bottle cage

Total cost 5 ($0.50 3 # of water bottle cages) 1 $5,000

$25,000 5 $0.50 3 40,000 1 $5,000

Direct materials. . . . . . . . . . . . . . . . . . . . . . . . . $1,720,000

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,120,000

Variable overhead . . . . . . . . . . . . . . . . . . . . . . 560,000

Fixed overhead (Note 1). . . . . . . . . . . . . . . . . . 880,000

Selling expense (Note 2) . . . . . . . . . . . . . . . . . 720,000

Administrative expense (fixed) 200,000

$5,200,000

Notes:

1. Beyond normal capacity, fixed overhead cost increases $30,000 for each 20,000 units or fraction

thereof until a maximum capacity of 640,000 units is reached.

2. Selling expenses are a 10% sales commission. Ralston pays only one-half of the regular sales

commission rates on any sale of 20,000 or more units.

Ralston’s sales manager has received a special order for 48,000 units from a large discount chain at a

special price of $16 each, F.O.B. factory. The controller’s office has furnished the following additional

cost data related to the special order:

1. Changes in the product’s construction will reduce direct materials $1.80 per unit.

2. Special processing will add 25% to the per-unit direct labor costs.

3. Variable overhead will continue at the same proportion of direct labor costs.

4. Other costs should not be affected.

Required

a. Present an analysis supporting a decision to accept or reject the special order. Assume Ralston’s

regular sales are not affected by this special order.

b. What is the lowest unit sales price Ralston could receive and still make a before-tax profit of

$39,600 on the special order?

Increased revenue attributable to the special order Increased variable costs attributable to the special order (Calculate the per unit variable cost first, the the total) $ - Per unit variable cost Units in special order Total variable costs Contribution margin Incremental fixed costs Increase in net income before taxes Should the special order be accepted? Why, or why not? b Meeting a target profit: Adjusted unit variable cost (w/reduced commission) Total adjusted variable costs Total increase in fixed costs Desired net income before income before income taxes Total cost (excluding commission) plus desired net income before $ 39,600 39,600 ($501,600 = 0.95) Minimum price per unit

Answer 1

ANSWER

As per the given question,

Answer along with working notes is given below:

Working notes: Output 400,000 Direct Material Direct Labour Variable overhead Variable OH% of DL 1,720,000 1,120,000 560,000 per unit changes Revised cost 4.30 -1.80 2.50 2.80 0.70 3.50 1.40 1.75 50% 50% a. Special order acceptance: Sales price 48,000 16 768,000 Total Sales Less: Variable cost Direct Material Direct Labour Variable overhead Sales commission @ 5% per unit 2.50 3.50 120,000 168,000 84,000 38,400 1.75 0.80 Total Variable cost 410,400 Revised Contribution 357,600 Incremental Fixed Cost 90,000 Net profit 267,600 Decision : Accept the proposal of special order b. Lowest sale price Pre-tax profit Fixed cost Total 39,600 90,000 129,600 Special order units 48,000 2.70 Required per unit per unit Direct Material Direct Labour Variable overhead 2.50 3.50 1.75 Total cost per unit selling commission 10.45 95% cost 5% 100% cost 11.00 Therfore Selling price Lowest which can be accepted Cross checking 528,000 Sales Less : variable cost Direct Material Direct Labour Variable overhead selling commission Total variable cost 120,000 168,000 84,000 26,400 398,400 Net contribution Less: Fixed cost 129,600 90,000 Net profit 39,600

THANK YOU FOR THE QUESTION.....KINDLY RATE....IT HELPS ME A LOT