Question

Alpine Luggage has a capacity to produce 380,000 suitcases per year. The company is currently producing and selling 300,000 units per year at a selling price of $404 per case. The cost of producing and selling one case follows:

Variable manufacturing costs	$	162
Fixed manufacturing costs		42
Variable selling and administrative costs		85
Fixed selling and administrative costs		19
Total costs	$	308

The company has received a special order for 20,000 suitcases at a price of $249 per case. It will not have to pay any sales commission on the special order, so the variable selling and administrative costs would be only $48 per suitcase. The special order would have no effect on total fixed costs. The company has rejected the offer based on the following computations:

Selling price per case	$	249
Variable manufacturing costs		162
Fixed manufacturing costs		42
Variable selling and administrative costs		48
Fixed selling and administrative costs		19
Net profit (loss) per case	$	(22	)

Required:

a. What is the impact on profit for the year if Alpine accepts the special order? (Enter your answers in thousands of dollars. Select option "higher" or "lower", keeping Status Quo as the base. Select "none" if there is no effect.)

Answer 1

Since there is spare capacity, no additional fixed costs will be incurred for the special order. Only incremental costs should be considered for the purpose of this decision.

a.Impact on Profits

	300,000 Units	320,000 Units	Difference
Sales	121,200,000	126,180,000	4,980,000	HIGHER
Variable costs:
Manufacturing	48,600,000	51,840,000	3,240,000	HIGHER
Selling and Admin	25,500,000	26,460,000	960,000	HIGHER
Contribution Margin	47,100,000	47,880,000	780,000	HIGHER
Fixed costs	18,300,000	18,300,000	0	NONE
Operating Profit	28,800,000	29,580,000	780,000	HIGHER