Question

Alpine Luggage has a capacity to produce 200,000 suitcases per year. The company is currently producing and selling 80,000 units per year at a selling price of $160 per case. The cost of producing and selling one case follows. Variable manufacturing costs $ 64 16 32 Fixed manufacturing costs Variable selling and administrative costs Fixed selling and administrative costs Total costs $120 The company has received a special order for 5,000 suitcases at a price of $100 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 $20 per suitcase. The special order would have no effect on total fixed costs. The company has rejected the offer based on the following computations. $100 64 16 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 20 8 $ (8) Required a. What is the impact on profit for the year if Alpine accepts the special order? Show computations. b. Do you agree with the decision to reject the special order? Explain.

Answer 1

Answer

a Calculation of net income of Alpine Luggage for its current sales

Particulars	$
Sales (80,000 × 160)	12,800,000
Less expenses:
Variable manufacturing costs (80,000 × 64)	5,120,000
Variable selling and administrative costs (80,000 × 32)	2,560,000
Fixed manufacturing costs (80,000 × 16)	1,280,000
Fixed selling and administrative costs (80,000 × 8)	640,000
Net income	3,200,000

Net income of Alpine from its current sales $3,200,000.

Calculation of income from special order

Particulars	$
Sales (5,000 × 100)	500,000
Less Expenses:
variable manufacturing costs (5,000 × 64)	320,000
Variable selling and administrative expenses (5,000 × 20)	100,000
Net income	80,000

Total net income = 3,200,000 + 80,000 = $3,280,000

The above calculations clearly show that the special order increase the net income by $80,000.

Total Fixed cost are not increase or decrease with change in production.there additional fixed cost are not incurred for special order.

b NOT AGREE

because the special order generate a income of $80,000 to the Alpine Luggage company. If they are not accept the special order, Alpine Luggage Luggage company income is $3,200,000. If they are accept the special order company income increased to $3,280,000.

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