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	$	19.50
Labor		13.50
Variable overhead		6.50
Fixed overhead ($3,487,500 per year; 465,000 units per year)		7.50
Total	$	47.00

Riverside Discount Mart, a chain of low-price stores, has asked Fairmount 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. (Enter your answers in thousands rounded to 1 decimal place. (i.e., 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.)

c. Considering only profit, determine the minimum quantity of backpacks in the special order that would make it profitable. (Do not round intermediate calculations.)

Answer 1