Question

Andreasen Corporation manufactures thermostats for office buildings. The following is the cost of each unit: Materials $ 19.80 Labor 8.80 Variable overhead 3.80 Fixed overhead ($1,274,400 per year; 118,000 units per year) 10.80 Total $ 43.20

Simpson Company has approached Andreasen with an offer to buy 9,000 thermostats at a price of $48 each. The regular price is $68. Andreasen has the capacity to produce the 9,000 additional units without affecting its current production of 118,000 units. Simpson requires that each unit use its branding, which requires a more expensive label, resulting in an additional $2.80 per unit material cost. The labor cost of affixing the label will be the same as for the current models. The Simpson order will also require a one-time rental of packaging equipment for $83,200.

Required: a. Prepare a schedule to show the impact of filling the Simpson order on Andreasen'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.)

b. Do you agree with the decision to accept the special order? Yes No

c. Considering only profit, determine the minimum quantity of thermostats in the special order that would make it profitable, assuming capacity is available.

Answer 1

Answer:

a. Prepare a schedule to show the impact of filling the Simpson order on Andresen's profits for the year.

	Status Quo 118,000 Units	Alternative 127,000 Units	Difference
Sales revenue	8024000	8456000	432000	higher
Less variable costs:
Material	2336400	2539800	203400	higher
Labor	1038400	1117600	79200	higher
Variable overhead	448400	482600	34200	higher
Total variable cost	3823200	4140000	316800	higher
Contribution margin	4200800	4316000	115200	higher
Less: Fixed costs	1274400	1357600	83200	higher
Operating profit(loss)	2926400	2958400	32000	higher

working notes for the above answer is as under

_________________________________________________________________

b. Do you agree with the decision to accept the special order?

Answer: Yes

________________________________________________________________

c.

Considering only profit, determine the minimum quantity of thermostats in the special order that would make it profitable, assuming capacity is available.

Answer:6500 units

Working notes for the above answer is as under

The incremental fixed cost is $83,200 (the one­time rental).

The contribution margin for the additional units is $12.8 (= $48 − $19.8 − $8.8 − $3.8 − $2.8) where the $2 is for the additional material.

Therefore the quantity of thermostats in the special order that would make it profitable

=83200/12.8

=6500 units