Question

Alpine Luggage has a capacity to produce 360,000 suitcases per year. The company is currently producing and selling 280,000 units per year at a selling price of $401 per case. The cost of producing and selling one case follows:

Variable manufacturing costs	$	165
Fixed manufacturing costs		40
Variable selling and administrative costs		83
Fixed selling and administrative costs		19
Total costs	$	307

The company has received a special order for 30,000 suitcases at a price of $251 per case. It will not have to pay any sales commission on the special order, so the variable selling and administrative costs would be only $51 per suitcase. The special order would have no effect on total fixed costs. The company has rejected the offer based on the following computations:

Selling price per case	$	251
Variable manufacturing costs		165
Fixed manufacturing costs		40
Variable selling and administrative costs		51
Fixed selling and administrative costs		19
Net profit (loss) per case	$	(24	)

Required:

a. What is the impact on profit for the year if Alpine accepts the special order? (Enter your answers in thousands of dollars. Select option "higher" or "lower", keeping Status Quo as the base. Select "none" if there is no effect.)

Status Quo 280,000 Units Alternative 310,000 Units Difference higher or lower?

Sales revenue   

Variable costs:

Manufacturing

Selling and administrative

Contribution margin

Fixed costs

Operating profit

b. Do you agree with the decision to reject the special order?

yes or no?

Answer 1

	(All costs in $000)
Particulars	Status quo	Alternative	Difference
	(280000 units)	(310000 units)
Sales revenue	112280	119810	7530	Higher
Variable costs
Manufacturing cost	46200	51150	4950	Higher
Selling and administrative cost	23240	24770	1530	Higher
Contribution margin	42840	43890	1050	Higher
Fixed cost	16520	16520	0
Operating profit	26320	27370	1050	Higher

Therefore, Proposal to reject cannot be agreed with. Because if the proposal is accepted there would be an increase in the operating profit.

Working notes	280000 units	310000 units
Sales revenue	280000*401	(28000*401)+ (30000*251)
Variable costs
Manufacturing cost	280000*165	(280000+30000)*165
Selling and administrative cost	280000*83	(280000*83)+(30000*51)

Fixed cost remains the same i.e(40+19)* 280000.