Question

- $30.000 Sherene Nil 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 Number of dresses $50.000 $120.000 $10.000 S8000 $ 18,000 20,000 Machine depreciation 4.200 2.800 Heat and light Other production con Marketing and administration 7.700 Total $ 67000 Operating profit $ 13,000 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 900 hours, of which 600 hours will be used to make custom dresses. The rent is for the building space, which has been leased for several years at $7,000 per month. The rent, heat, and ight 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. Na for a special favor. This customer has a client who wants to get married in early April. Ms. Nul's company is working at capacity and would have to give up some other business to make this dress. She can't renge 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 $24,000 for the special order. Materials and labor for the order will cost $6,000 and $10,000, respectively. The special order would require 140 hours of machine time. Ms. Nill's company would save 150 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 Materials Machine depreciation Contribution margin Rent Heat and light Other production costs Marketing and administration Operating profit oss)

Answer 1

Ques a-1	Without special order	With special order	Impact
Sales revenue	$                        80,000	$                  89,000	$   9,000	Increase	(24000-(10*30000/20))
Materials	$                        18,000	$                  20,000	$   2,000	Increase	(6000-(10*8000/20))
Labor	$                        29,000	$                  34,500	$   5,500	Increase	(10000-(10*9000/20))
Machine depreciation	$                              900	$                        890	$         10	Decrease	150*1-140*1
Contribution margin	$                        32,100	$                  33,610	$   1,510	Increase
Rent	$                           7,000	$                    7,000		None
Heat and light	$                           1,600	$                    1,600		None
Other production costs	$                           2,800	$                    2,800		None
Marketing and administration	$                           7,700	$                    7,700		None
Operating profit	$                        13,000	$                  14,510	$   1,510	Increase
a-2	Accept
Based on profit, Ms. Nili should accept the special order. Accepting the special order means Ms. Nili will only be able to produce 10 standard dresses. Because she is committed to the custom dresses (whether more profitable or not), she must cut back the number of standard dresses by 10. The rent, heat and light, and other production costs are fixed and will not be affected by this decision.
b.
Minium price
Order revenue	$                        24,000
Less:Impact	$                           1,510
Minium price	$                        22,490