Question

Alpine Luggage has a capacity to produce 420,000 suitcases per year. The company is currently producing and selling 340,000 units per year at a selling price of $398 per case. The cost of producing and selling one case follows: Variable manufacturing costs Fixed manufacturing costs Variable selling and administrative costs Fixed selling and administrative costs Total costs $ 160 39 81 22 $ 302 The company has received a special order for 30,000 suitcases at a price of $250 per case. It will not have to pay any sales commission on the special order, so the variable selling and administrative costs would be only $50 per suitcase. The special order would have no effect on total fixed costs. The company has rejected the offer based on the following computations: $ 250 Selling price per case Variable manufacturing costs Fixed manufacturing costs Variable selling and administrative costs Fixed selling and administrative costs Net profit (loss) per case 160 39 50 22 $ (21) Required: a. What is the impact on profit for the year if Alpine accepts the special order? (Enter your answers in thousands of dollars. Select option "higher" or "lower", keeping Status Quo as the base. Select "none" if there is no effect.) (All revenues and costs in $000) Status Quo Alternative 340,000 Units 370,000 Units Difference higher Sales revenue Variable costs: Manufacturing Selling and administrative Contribution margin Fixed costs Operating profit b. Do you agree with the decision to reject the special order? O Yes O No

Answer 1

1) All revenue and cost in $000

Particulars	Status quo 340,000 units	Alternative 370,000 units	Difference
Sales revenue	$135,320 (340,000×$398)	$142,820 (340,000×$398)+(30,000×$250)	$7,500	Higher
Less: Variable cost
Manufacturing cost	($54,400) (340,000×$160)	($59200) (370,000×$160)	$4,800	higher
Selling and administrative expenses	($27,540) (340000×$81)	($29,040) (340,000×$81)+(30,000×$50)	$1,500	Higher
Contribution margin	$53,380	$54,580	$1,200	higher
Less: Fixed cost	($20,740) (340000×($39+$22))	($20,740) (340000×($39+$22))	0
Operating profit	$32,640	$33,840	$1,200	higher

Note: special order has no effect on the fixed cost, it remain same.

2) No

Proposal to reject the special order cannot be agreed, because if the special order is accepted there would be increase in the operating profit.