Question

Alpine Luggage has a capacity to produce 410,000 suitcases per year. The company is currently producing and selling 330,000 units per year at a selling price of $395 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 $ 163 39 83 19 $ 304 The company has received a special order for 20,000 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: 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 $ 250 163 39 50 19 $ (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", keepirig Status Quo as the base. Select "none" if there is no effect.) Answer is complete but not entirely correct. (All revenues and costs in 5000) Status Quo Alternative 330,000 Difference Units 350,000 Units $ 130,350,000 $ 135,350,000 higher 5,000,000 Sales revenue Variable costs: Manufacturing Selling and administrative Contribution margin Fixed costs Operating profit 53,790,000 57,050,000 Ⓡ 3,260,000 higher 27,390,000 28,390,000 1,000,000 higher $ 49,170,000 Ⓡ$ 49,910,000 $ 740,000 higher 19,140,000 1,914,000 lower $ 30,030,000 $30,770,000 $ 740,000 higher

Answer 1

	Status Quo	Alternative	Difference
	330000 units	350000 units
Sales revenue	130350	135350	5000	higher
Variable costs:
Manufacturing	53790	57050	3260	higher
Selling and administrative	27390	28390	1000	higher
Contribution margin	49170	49910	740	higher
Fixed costs	19140	19140	0	None
Operating profit	30030	30770	740	higher

Workings:
	Status Quo
	Total	in thousands
Sales revenue	130350000	130350	=330000*395
Variable costs:
Manufacturing	53790000	53790	=330000*163
Selling and administrative	27390000	27390	=330000*83
Contribution margin	49170000	49170
Fixed costs	19140000	19140	=330000*(39+19)
Operating profit	30030000	30030
	Special order	in thousands
Sales revenue	5000000	5000	=20000*250
Variable costs:
Manufacturing	3260000	3260	=20000*163
Selling and administrative	1000000	1000	=20000*50
Contribution margin	740000	740
Fixed costs	0	0
Operating profit	740000	740