Question

Fairmount Travel Gear produces backpacks and sells them to vendors who sell them under their own label. The cost of one of its backpacks follows.

Fairmount Travel Gear produces backpacks and sells them to vendors who sell them un backpacks follows. Materials Labor Variable overhead Fixed overhead ($3,220,000 per year; 460,000 units per year) Total $19.00 13.00 6.00 7.80 $45.00 Riverside Discount Mart, a chain of low-price stores, has asked Fairmount to supply it v Riverside is planning. Riverside has offered to pay Fairmount a unit price of $49 per pa order would require some modification to the basic model. These modifications would unit in labor cost, and $1.50 in variable overhead cost. Although Fairmount has the cap affecting its regular production of 460,000 units, a one-time rental of special testing ec would be needed. The equipment rental would be $68,000 and would allow Fairmour Required: a. Prepare a schedule to show the impact of filling the Riverside order on Fairmont's p b. Do you agree with the decision to accept the special order? c. Considering only profit, determine the minimum quantity of backpacks in the specia

Riverside Discount Mart, a chain of low-price stores, has asked Fairmount to supply it with 29,000 backpacks for a special promotion Riverside is planning. Riverside has offered to pay Fairmount a unit price of $49 per pack. The regular selling price is $70. The special order would require some modification to the basic model. These modifications would add $5.00 per unit in material cost, $2.50 per unit in labor cost, and $1.50 in variable overhead cost. Although Fairmount has the capacity to produce the 29,000 units without affecting its regular production of 460,000 units, a one-time rental of special testing equipment to meet Riverside’s requirements would be needed. The equipment rental would be $68,000 and would allow Fairmount to test up to 60,000 units.

Required:

a. Prepare a schedule to show the impact of filling the Riverside order on Fairmont’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 backpacks in the special order that would make it profitable.
  

Answer 1

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Fairmount Travel Gear
Ans a	A	B	C=A+B	Note
Particulars	Current cost	Cost increase by	Revised cost
Materials	19.00	5.00	24.00
Labor	13.00	2.50	15.50
Variable Overhead	6.00	1.50	7.50
Total cost per unit			47.00	D
Number of bags			29,000.00	E
Total variable cost			1,363,000.00	F=D*E
Equipment rental			68,000.00	G
Total cost			1,431,000.00	H=F+G
Sell price		49.00		I
Sale Value			1,421,000.00	J=I*E
Net Loss			10,000.00	K=H-I

Fixed costs are sunk costs and not relevant for this offer so not considered.

Workings
Total cost of 460,000 units.	Per Unit	Amount
Units	460,000.00
Sales revenue	70.00	32,200,000.00	This is 460,000 units * Sell price per unit i.e. $ 70.
Materials	19.00	8,740,000.00	This is 460,000 units * Materials cost per unit i.e. $ 19.
Labor	13.00	5,980,000.00	This is 460,000 units * Labor cost per unit i.e. $ 13.
Variable Overhead	6.00	2,760,000.00	This is 460,000 units * Variable Overhead cost per unit i.e. $ 6.
Total cost of additional 22,000 units.	Per Unit	Amount
Units	29,000.00
Sales revenue	49.00	1,421,000.00	This is 29,000 units * Sell price per unit i.e. $ 49.
Materials	24.00	696,000.00	This is 29,000 units * Materials cost per unit i.e. $ 24.
Labor	15.50	449,500.00	This is 29,000 units * Labor cost per unit i.e. $ 15.50.
Variable Overhead	7.50	217,500.00	This is 29,000 units * Variable Overhead cost per unit i.e. $ 7.50.

Total cost of 489,000 units.	Amount
Units	489,000.00	This is sum of 460,000 units and 29,000 units.
Sales revenue	33,621,000.00	This is sum of sales revenue of 460,000 units and 29,000 units.
Materials	9,436,000.00	This is sum of Materials cost of 460,000 units and 29,000 units.
Labor	6,429,500.00	This is sum of Labor cost of 460,000 units and 29,000 units.
Variable Overhead	2,977,500.00	This is sum of Variable Overhead cost of 460,000 units and 29,000 units.

Income Statement	460,000 units	489,000 units	Difference
Sales revenue	32,200,000.00	33,621,000.00	1,421,000.00	See Workings above
Less: Variable costs
Materials	8,740,000.00	9,436,000.00	696,000.00	See Workings above
Labor	5,980,000.00	6,429,500.00	449,500.00	See Workings above
Variable Overhead	2,760,000.00	2,977,500.00	217,500.00	See Workings above
Total Variable costs	17,480,000.00	18,843,000.00	1,363,000.00	See Workings above
Contribution	14,720,000.00	14,778,000.00	58,000.00	See Workings above
Less: Fixed costs
Fixed Overhead	2,853,900.00	2,853,900.00	-	This is already given in the question.
Equipment rental		68,000.00	68,000.00	This is already given in the question.
Total Fixed costs	2,853,900.00	2,921,900.00	68,000.00
Net profit	11,866,100.00	11,856,100.00	(10,000.00)

Ans b

Fairmount Travel Gear will lose $10,000 if it accepts the offer. So the offer should not be accepted.

Ans c	Amount $
Total cost	1,431,000.00
Sell Price	49.00
Number of units	29,204.08

So minimum quantity should be 29,204 bags to attain breakeven point. Any quantity above 29,204 bags will give profits.