Question

The Columbia Company provides landscaping services to corporations and businesses. All its landscaping work requires Columbia to use landscaping equipment. Its landscaping equipment has the capacity to do 12,000 hours of landscaping work. It currently anticipates getting orders that would utilize 11,000 hours of equipment time from existing customers. Columbia charges $100 per hour for landscaping work. Cost information for the current expected activity level is as follows EE (Click the icon to view the cost information.) Read the requirement Without One-Time Only Special Order With One-Time Only Special Order 1100000 137500 Relevant revenues Relevant variable costs 92000 66000 158000 1258000 175000 Landscaping costs 6875 Marketing costs Total relevant costs Relevant operating income le h le Choose from any list or enter any number in the input fields and then continue to the next question hoi Data Table Revenues (5100 x 11,000 hours) Variable landscaping costs (including materials and labor), which vary ,100,000 770,000 with the number of hours worked ($70 per hour x 11 Fixed landscaping costs Variable marketing costs (5% of revenues) Fixed marketing costs Total costs Operating income 92,000 55,000 66,000 983,000 117,000 Print Done Requirement Columbia has received an order for landscaping work from Ashley Corporation at $55 per hour that would require 2,500 hours of equipment time. Variable landscaping costs for the Ashley Corporation order are $70 per hour and variable marketing costs are 5% of revenues. Columbia can either accept the Ashley offer in whole or reject it. Should Columbia accept the offer? Print Done

Answer 1

Since the company has capacity of 12000 hours, and it already anticipates 11000 hours of work. With accepting 2500 hours special order, company has to forgo 1500 hours of existing customers work i.e. It can cater to existing customers for 9500 (12000 - 2500) hours of work.

	With new order	With new order
	11000 hours	12000 hours
Revenue	$      1,100,000.00	$      1,087,500.00	9500 x 100 + 2500 x 55
Relevant Variable Costs
Variable Landscaping Costs	$         770,000.00	$         840,000.00	12000 x 70
Variable Marketing Costs	$            55,000.00	$            54,375.00	1087500 x 5%
Total Relevant Costs	$         825,000.00	$         894,375.00
Relevant Operating Income	$         275,000.00	$         193,125.00

Company should reject the offer, since its relevant operating cost is going down by accepting the offer.
Moreover at bird eye view also, company should reject the offer as they will get $55 per hour against $70 per hour variable cost and other expenses