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 Materials Labor Variable overhead Fixed overhead (53,487,500 per year; 455, one units per year) Total $19.50 13.50 6.50 7.50 $47.00 Riverside Discount Mart, a chain of low-price stores, has asked Falmount to supply it with 34,000 backpacks for a special promotion Riverside is planning. Riverside has offered to pay Fairmount a unit price of $52 per pack. The regular selling price is $75. The special order would require some modification to the basic model. These modifications would add $5.50 per unit in material cost, $3.00 per unit In labor cost and $2.00 in variable overhead cost. Although Fairmount has the capacity to produce the 34,000 units without affecting its regular production of 465,000 units, a one-time rental of special testing equipment to meet Riverside's requirements would be needed. The equipment rental would be $78,000 and would allow Fairmount to test up to 65,000 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 Complete this question by entering your answers in the tabs below. Required A Required B Required C Prepare a schedule to show the impact of filling the Riverside order on Fairmont's profits for the year. (Enter your answers in thousands rounded to 1 decimal place. (l... 5.400.400 should be entered as 5.400.4). Select option higher" or "lower". keeping Status Quo as the base. Select "none" if there is no effect.) (All Costs in Thousands of Dollars) Status Quo Alternative 465,000 Units 499.000 Units Difference higher Sales revenue Less variable costs Materials Labor Variable overhead Total variable cost Contribution margin Less: Foved costs Operating protos) $ 0.05 0.0 higher higher highes higher higher Thigher power Required B >

Answer 1

1)

(All Costs in Thousands of Dollars)
	Status Quo 465000 units	Alternative 499000 units	Difference
Sales revenue	(465*$75)= $34875.0	(465*$75+34*$52)= $36643.0	(36643.0-34875.0)= $1768.0	higher
Less: Variable costs
Materials	(465*$19.50)= 9067.5	9917.5	(9917.5-9067.5)= 850.0	higher
Labor	(465*$13.50)= 6277.5	6838.5	(6838.5-6277.5)= 561.0	higher
Variable overhead	(465*$6.50)= 3022.5	3311.5	(3311.5-3022.5)= 289.0	higher
Total variable cost	18367.5	20067.5	1700.0	higher
Contribution margin	16507.5	16575.5	68.0	higher
Less: Fixed costs	3487.5	3565.5	78.0	higher
Operating profit (loss)	$13020.0	$13010.0	$10.0	lower

Calculation of Alternative 499000 units

Materials= ($19.50+5.50)*34+9067.5= $9917.5

Labor= ($13.50+3.00)*34+6277.5= $6838.5

Variable overhead= ($6.50+2.00)*34+3022.5= $3311.5

Fixed costs= 3487.5+78= $3565.5

2) No, the special order should not be accepted as the operating profit of the company will decreases if the special order is accepted.

3) Contribution margin for the additional units= Selling price-Materials-Labor-Variable overhead

= $52.0-19.5-13.5-6.5-5.5-3.0-2.0= $2.00

Fixed additional cost= One time rental cost= $78000

Minimum quantity of backpacks= Fixed additional cost/Contribution margin for the additional units

= $78000/2.0= 39000

The minimum quantity of backpacks

39000

units

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