Question

Sherene Nili 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:

Sherene Nili manages a company that produces wedding gowns. She pro standard product that is sold in bridal salons. Her accountant prepared th a busy month: k Custom Dresses 10 $46,500 $ 9,300 19,300 530 3,500 1,200 Number of dresses Sales revenue Materials Labor Machine depreciation Rent Heat and light Other production costs Marketing and administration Total costs Operating profit Standard Dresses Total 20 30 $26,500 $73,000 $ 7,300 $ 16,600 8,300 27,600 230 760 2,100 5,600 800 2,000 2,100 7,000 $61,660 $ 11,340 ces Ms. Nili already has orders for the 10 custom dresses reflected in the Mar are for machines used in the respective product lines. Machines deprecia are variable costs. In March, cutting and sewing machines are expected to make custom dresses. The rent is for the building space, which has been and light are allocated to the product lines based on the amount of floors

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 760 hours, of which 530 hours will be used to make custom dresses. The rent is for the building space, which has been leased for several years at $5,600 per month. The rent, heat, and light 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. Nili for a special favor. This customer has a client who wants to get married in early April. Ms. Nili's company is working at capacity and would have to give up some other business to make this dress. She can't renege 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 $22,300 for the special order. Materials and labor for the order will cost $5,300 and $9,300, respectively. The special order would require 105 hours of machine time. Ms. Nili's company would save 115 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).

a-2. From an operating profit (loss) perspective for March, should Ms. Nili accept the order?

b. What is the minimum price Ms. Nili should accept to take the special order?

Answer 1

Please find the answers in the attached images.

as per the calculations below Ms Nill can accept the special order plase refer the images for the detailed calculations.

Calculation of operating profit (present) Particuless custom standard Toral. pressors dresses sales Revenue (A) 46.500 26.500 73.00u: (-) variable Cost Materials 9,200 1,200 16,600 Labor 19,300 8.300 27.600 Depriciation 530 230 460 29,130 15,830 44,960 Contribution 17,370 10,670 28,040 (A-B) Fixed cost 2100 5600 3500 Rent SOD 2000 1200 cost 2100 teat of Light Other production Marketing & Administration (D) 007 16,700 11,340 Poosit / Loss (e-D)=(E) Note'. It te tompon ms will accepting the Special Order, stare company has to reduce the standrad from which is reduced by to accordingly variable Cost also dear reduce existing Variable Cost dressess to 10 50'). . 501 of

statement showing the operating profit / loss at Standard dressess Reduced Count of standard Total. Particuless [Custom pressess dresses 10 20. 10 No 06 Dresses sales Revenue (A) 26,500 13,250 59,750 Variable Cost 9300 36 50 112,950 Materials 19,301 4150 23,450 530 115 bus labor Depreciation Total variable cost (B) 29,1309915 3tous 17,370 5335 22705 Contribution (6) CA-B) Fixed cost (0) 16 foo. 6oo5 Profit - E (c-D) Now or loss the 3 lets calculate the Profit to accepting add Order from valed is accepted by reducing the Standard dressess by customer which 10.

Statement showing the prosit loss from Special Erdir | Amoon H 22.300 Particularis Revenue from the Special order. (-) Incremental cost for the Special order. Materiales 5300 9,300 Labor Machine hours (Depreciation) 105 Profit from the Special ordera | 7595 Addi probit from. custom and standard 6005 dressess at Reduced Total Protit when accepting Special Order | 13,600 Total Protit editterent when before the 11,340 Special Order Differential 2260. protit Since there is an increase in protit M8 Niit Can accept the Special Order Minnimum price that ms.oil shoud accept the Special Order is anything more than 20040 ( 22 300 22602 to maintain the same level of probita