Question

Sherene Nili manages a company that produces wedding gowns. She produces both a custom product that is made to order and a standard product that is sold in bridal salons. Her accountant prepared the following forecasted income statement for March, which is a busy month: Custom Dresses Standard Dresses Total Number of dresses S55.000 S 11.000 21.000 Walerials Labar Machine depreciation Rent Heal and light Other production costs Marketing and administration Total costs Operating profit $35,000 $ 9,000 10,000 400 3,800 700 5.200 1.10D $ 90,000 $ 20,000 31,000 1.10 9.000 1.800 3.ang 8.700 $ 75,400 $ 14,600 Ms. Nili already has orders for the 10 custom dresses reflected in the March forecasted income statement. The depreciation charges are for machines used in the respeclive product lines, Machines depreciate at the rate of $1 per hour based on hours used, so these are variable costs. In March, Cutting and sewing machines are expected to operate for 1,100 hours, of which 700 hours will be used to make custom dresses. The rent is for the building space, which has been leased for several years al $9,000 per month. The rent, heat, and light are allocated the product lines based on the amount of floor space occupied. A valued customer, who is a wedding consultant, has asked Ms. Nili for a special favor. This customer has a client who wants to get married in early April. Ms. Nili's company is working at capacity and would have to give up some other business to make this dress. She can't renege on custom orders already agreed to, but she can reduce the number of standard dresses produced in March to 10. Ms. Nili would lose permanently the opportunity to make up the lost production of standard dresses because she has no unused capacity for the foreseeable future. The customer is willing to pay $29,000 for the special order. Materials and labor for the order will cost $7,DDD and $11,000, respectively. The special order would require 180 hours of machine time. Ms. Nili's company would save 200 hours of machine time from the standard dress business given up. Rent, heat and light, and other production costs would not be affected by the special order. Required: a-1. Calculate the differential operating profit loss). (Select option "Increase" or "decrease", keeping Without special order as the base. Select "none" If there is no effect.) Without Special Order With Special Order Impact Revenue Materiale Labor Machine depreciation Contribution margin Hent Heat and light Other production costs Marketing and administration Operating profit (loos)

Answer 1

Answer with working notes and explanation is given below

Working notes: Custom Dresses Standard Dresses Special Order Total 10 10 $55,000 $17,500 $29,000 $101,500 Number of Dresses Sales Revenue Less: Costs Materials Labor Machine Depreciation Rent Heat and Light Other production cost Marketing and administration Total Costs Operating Profit $11,000 $21,000 $700 $5,200 $1,100 $4,500 $5,000 $200 $3,800 $700 $7,000 $11,000 $180 $22,500 $37,000 $1,080 $9,000 $1,800 $3,800 $8,700 $83,880 $17,620 Note: Fixed cost allocation will remain same For Standard Dresses variable cost allocation will change proportionate to order Standard Dresses Revenue will be 50% of existing Revenue Direct material and labor will be 50% of existing cost Machine Depreciation = 200 machine hours x $1 a 1) With Special Order Differential Profit /(Loss) $101,500 $11,500 Differential Operating Profit/(Loss) Without Special Order Number of Dresses Sales Revenue $90,000 Less: Variable Cost Materials $20,000 Labor $31,000 Machine Depreciation $1,100 Contribution Margin $37,900 Less: Fixed cost Rent $9,000 Heat and Light $1,800 Other production cost $3,800 Marketing and administration $8,700 Operating Profit $14,600 $22,500 $37,000 $1,080 $40,920 $2,500 $6,000 -$20 $3,020 $9,000 $1,800 $3,800 $8,700 $17,620 $3,020 a 2) Since there is incremental profit the order should be accepted Minimum price to be accepted for special order Existing Sales Revenue $29,000 Less: Incremental profit $3,020 Minimum price $25,980