Question

a) Exercise 1: What is the Contribution to Profit for the Special Order Decision? And, should Deco accept the offer. Yes or No?   See circles on the printed exercise. A complete answer will include both a dollar amount and Yes or No.  

EXERCISE 1: Deco Art Company. produces decorative picture frames. A recent analysis of fixed and variable costs per unit is as follows Deco Art currently sells each frame for a price of $4.50 each. Wheeler Company has offered to buy 5,000 frames from Deco Art at a price of $2.90 each. Deco Art does not expect to receive any future sales from Wheeler (ie. one-time special order). Deco Art has the extra capacity to produce the additional frames. Deco Art expects no additional fixed costs to be incurred by accepting the order but the current fixed costs are unavoidable. Following is a cost analysis per unit. To solve this problem 1) Define the decision. Answer: ACCEPT or DECLINE the order. 2) Analyze each revenue and cost element for relevancy. The criteria for relevant information is: a. Does the information occur in the future (i.e. not a sunk cost)? b. Does the information differ among the alternatives? Relevant Yes or No Decline Accept Unit Work Area $2.90 Revenues Variable Costs 1.26 Direct Materials Direct Labor 0.98 Variable Overhead 0.37 Fixed Overhead 0.84 $ Contribution to Profit Should Deco Art accept the order. Yes or No?

Answer 1

Since fixed costs will not increase, no fixed overhead will be charged to the special order.

	Unit	Relevant	Work Area	Accept	Decline
Revenues	2.90	Yes	5,000*2.90 = 14,500
VC:
Direct Material	1.26	Yes	6,300
Direct Labor	0.98	Yes	4,900
Variable Overhead	0.37	Yes	1,850
Fixed Overhead	0.84	NO
Contribution to Profit				$1,450

Since there is additional profit, YES the order should be accepted