Question

Andreasen Corporation manufactures thermostats for office buildings. The following is the cost of each unit.

Materials	$	36.00
Labor		14.00
Variable overhead		4.00
Fixed overhead ($1,818,000 per year; 101,000 units per year)		18.00
Total	$	72.00

Simpson Company has approached Andreasen with an offer to buy 7,600 thermostats at a price of $60 each. The regular price is $100. Andreasen has the capacity to produce the 7,600 additional units without affecting its current production of 101,000 units. Simpson requires that each unit use its branding, which requires a more expensive label, resulting in an additional $2.00 per unit material cost. The labor cost of affixing the label will be the same as for the current models. The Simpson order will also require a one-time rental of packaging equipment for $22,000.

Required:

a. Prepare a schedule to show the impact of filling the Simpson order on Andreasen's profits for the year.
b. Do you agree with the decision to accept the special order?
c. Considering only profit, determine the minimum quantity of thermostats in the special order that would make it profitable, assuming capacity is available.

Answer 1

Answer a. Profit will increase by $8400

Calculated as

Calculation of advantage or disadvantage from special order
	Per unit cost	Units	Total
Revenue form special order	60	7600	$ 456,000
Less: Relevant cost of special order
Direct material	36	7600	$ 273,600
Direct material	14	7600	$ 106,400
Variable Manufacturing overhead	4	7600	$    30,400
Special label cost	2	7600	$    15,200
one time rental of packaging equipment			$    22,000
Financial advantage form accepting order			$      8,400

Answer b : Yes, as accepting order will increase overall profit by $8400

Answer C: Minimum units of special order required = 5500 units

Calculated as

Contribution per unit from accepting order = Selling price - Variable cost

= $60-$36-14-4-2

= $4

Fixed cost of rental of a machine = $22000

Required units to break even = $22000/4 = 5500 units