Question

Sherene Nili manages a company that produces wedding gowns. She produces both a custom product that is made to order and a standard product that is sold in bridal salons. Her accountant prepared the following forecasted income statement for March, which is a 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 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 1,100 Ms. Nill 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. Nili's company is working at capacity and would have to give up some other business to make this dress. She can't renege on custom orders already agreed to, but she can reduce the number of standard dresses produced in March to 10

Answer 1

Sherene Nilli Statement of profitability: Custom Standard Dresses Dresses 10 20 47,000 27,000 Total 30 74,000 Total number of dressses Sales Revenue Less Total costs: Materials Labor Machine Depreciation Rent Heat and Light Total variable costs Other production costs Marketing and Admnistration total fixed costs Total costs Operating profits 9,400 19,400 540 3,600 1,100 34,040 7,400 8,400 240 2,200 700 18,940 16,800 27,800 780 5,800 1,800 52,980 2,200 7,100 9,300 62,280 11,720 Statement of profitability if the special order is accepted: Secial order Total Custom Standard Dresses Dresses 10 10 47,000 13,500 30 83,100 22,600 3,700 4,200 120 1,100 Total number of dressses Sales Revenue Less Total costs: Materials Labor Machine Depreciation Rent Heat and Light Total variable costs Contribution Other production costs Marketing and Admnistration Total fixed cost Total costs Operating profits 9,400 19,400 540 3,600 1,100 34,040 12,960 18,500 33,000 770 5,400 9,400 110 1,100 350 350 9,470 4,030 16,360 6,240 5,800 1,800 59,870 23,230 2,200 7,100 9,300 69,170 13,930 38,960 A) Should Ms. Nili take the order? Explain you answer. Ms. Nili should accept the special order as the operating profits increase by $2,210 (i.e. 13,930 - 11,720). B) What is the minimum prices. Nili should accept to take the special order? The minimum acceptable price for the special order is the total variable cost which is $16,390. C) What are the other factore, if any, besides price that she should consider? If the special order is accepted, the existing order will be permanently lost. The opportunity cost of losing the customers for standard dresses should be considered.