Question

Rutkey Collectibles is a small toy company that manufactures and sells metal replicas of classic cars. Each car sells for $40. The cost of each unit follows Materials Labor Variable overhead Fixed overhead ($160,000 per month, 20,000 units per month) Total costs per unit One of Rutkey's regular customers asked the company to fill a special order of 3,000 units at a selling price of $28 per unit. Rutkey's can fill the order using existing capacity without affecting total fixed costs for the month. However, Rutkey's manager was concerned about selling at a price below the $32 cost per unit and has asked for your advice. Required: 6. Prepare a schedule to show the impact of providing the special order of 3,000 units on Rutkey's profits in addition to the regular production and sales of 20,000 units per month b. Based solely on the data given, what is the lowest price per unit at which the model cars could be sold for the special order without reducing Rutkey's profits? c. If Rutkey Collectibles company was operating at capacity, what would happen to operating profit if the special order was accepted?

Answer 1

a.

	Status Quo 20,000 Cars	Alternative 23,000 Cars	Difference
Sales revenue	$800,000 (20,000*$40)	$884,000 (20,000*$40+3,000*$28)	$84,000	Higher
Less: Variable cost
Materials	240,000 (20,000*$12)	276,000 (23,000*$12)	36,000	Higher
Labor	160,000 (20,000*$8)	184,000 (23,000*$8)	24,000	Higher
Variable overhead	80,000 (20,000*$4)	92,000 (23,000*$4)	12,000	Higher
Total variable cost	480,000	552,000	72,000	Higher
Contribution margin	320,000	332,000	12,000	Higher
Less: Fixed costs	160,000	160,000	0	None
Operating profit	$160,000	$172,000	$12,000	Higher

b. Lowest price per unit:

Material cost per unit	$12
Labor cost per unit	8
Variable overhead cost per unit	4
Total lowest price per unit	$24

c. If the company was operating at capacity, operating profit would decrease on acceptance of special order. This is because acceptance of special order would result in the lowering of sales revenue than existing sales revenue.