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 ($1,854,000 per year; 103,000 units per year)		18.00
Total	$	72.00

Simpson Company has approached Andreasen with an offer to buy 7,800 thermostats at a price of $60 each. The regular price is $100. Andreasen has the capacity to produce the 7,800 additional units without affecting its current production of 103,000 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 $26,000.

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.

Prepare a schedule to show the impact of filling the Simpson order on Andreasen’s profits for the year. (Enter your answers in thousands rounded to 1 decimal place. (i.e., 5,400,400 should be entered as 5,400.4). Select option "higher" or "lower", keeping Status Quo as the base. Select "none" if there is no effect.)

	(All Costs in Thousands of Dollars) Status Quo 103,000 Units Alternative 110,800 Units Difference Sales revenue       Less variable costs: Materials Labor Variable overhead Total variable cost Contribution margin Less: Fixed costs Operating profit (loss)

Do you agree with the decision to accept the special order?

	Yesradio button unchecked1 of 2 No

Considering only profit, determine the minimum quantity of thermostats in the special order that would make it profitable, assuming capacity is available.

	Quantity of thermostats    units

Answer 1

Since there is spare capacity, only incremental costs are relevant for the special order as there will be no loss of regular sales
Schedule	Status Quo	Alternative	Difference
Units	103000	110800	7800	Higher
Sales Revenue	10,300,000	10,768,000	468,000	Higher
Variable Costs:
Material	3,708,000	4,004,400	296,400	Higher
Labor	1,442,000	1,551,200	109,200	Higher
Variable Overhead	412,000	443,200	31,200	Higher
Contribution Margin	4,738,000	4,769,200	31,200	Higher
Less: Fixed costs	1,854,000	1,880,000	26,000	Higher
Operating Profit	2,884,000	2,889,200	5,200	Higher
Yes, the order should be accepted since incremental profit
c.Minimum quantity = Increase in fixed costs/Contribution margin per unit
=26000/(60-38-14-4)
6500	units