Question

/ e problems (Managerial) ( Saved Adams Furniture receives a special order for 10 sofas for a special price of $3,000. The direct materials and direct labor for each sofa are $100. In addition, supervision and other fixed overhead costs average $150 per sofa. a1. What is the impact on operating income from accepting the special order? a2. Based solely on a short-term financial analysis, should Adams accept the special order? b1. If Adams is currently operating at full capacity, what would be the opportunity cost per unit for lost sales to regular customers if the special sales order is accepted and the selling price per unit on regular sales equals $500? b2. Based solely on a short-term financial analysis, should Adams accept the special order if it is currently operating at full capacity? Complete this question by entering your answers in the tabs below. Reg A1 Reg A2 Req B1 Req B1 Req B2 Reg B2 What is the impact on operating income from accepting the special order? Operating income would of by per sofa. per sota. Req A2 > 2 of 3 Score answer > POB

Answer 1

Opportunity cost is benefit forgone to apply the decision taken. This is the cost of foregoing another activity in lieu of current activity. The decision to accept or reject is based on contribution and not operating income as contribution is obtained by deducting relevant costs and operating income assumes irrelevant costs as fixed costs.

A1.

The contribution on the order is $3,000 – 10 x $100 = $2,000 or $200 per sofa.

Impact on operating income is $3,000 – 10 x (100+150) = $500 i.e. 50 per sofa

Hence, operating income increases by $ 500.

A2.

Therefore, Adams should accept the order as there is additional contribution of $ 200 per sofa.

B1.

If Adams is at full capacity, then the opportunity cost for lost sales is $500 - $100 = $400 per sofa

the opportunity cost is higher than the contribution on the special order, $200.

B2. The special order should not be accepted as opportunity cost is higher by $400-200= $ 200.