Question

Sherene Nili manages a company that produces wedding gowns. She produces both a custom product that is made to order and a tandard product that is sold in bridal salons. Her accountant prepared the following forecasted income statement for March, which is busy month: Number of dresses Sales revenue Materials Labor Machine depreciation Rent Heat and light Other production costs Marketing and administration Total costs Operating profit Custom Dresses 10 $47.000 $ 9,400 19,400 540 3,600 1,100 Standard Dresses 20 $27,000 $ 7,400 8,400 240 2,200 700 Total 30 $ 74,000 $16,800 27,800 780 5,800 1,800 2,200 7.100 $62,280 $11,720 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 780 hours, of which 540 hours will be used to make custom dresses. The rent is for the building space, which has been leased for several years at $5,800 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. Nill's company is working at capacity and would have to give up some other business to make this dress.

Answer 1

1				Without special order	With special order	Impact
	Revenue			74000	83100	9100	Increase
	Less:variable costs
	Materials			16800	18500	1700	Increase
	Labor			27800	33000	5200	Increase
	Machine depreciation			780	770	10	Decrease
	Contribution margin			28620	30830	2210	Increase
	Less:Fixed costs
	Rent			5800	5800	0
	Heat and light			1800	1800	0
	Other production costs			2200	2200	0
	Marketing and administration			7100	7100	0
	Operating profit (loss)			11720	13930	2210	Increase
	Workings:
				Custom dresses	Standard dresses	Special order	Total
	Number of dresses			10	10	1
	Revenue			47000	13500	22600	83100
					(27000/20)*10
	Less:variable costs
	Materials			9400	3700	5400	18500
					(7400/20)*10
	Labor			19400	4200	9400	33000
					(8400/20)*10
	Machine depreciation			540	120	110	770
					240-(120*1)
	Rent			3600	2200	0	5800
	Heat and light			1100	700	0	1800
	Other production costs						2200
	Marketing and administration						7100
	Total costs						69170
	Operating profit (loss)						13930
2	Ms. Nili should accept the special order since there is an increase in operating profit by $ 2210.
3	Minimum price:
				$
	Special order price			22600
	Less:Increase in operating profit			2210
	Minimum price			20390