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ICP 4 Albrecht Ltd. manufactures tackle boxes, and the company estimates that during the first quarter of this year, it will

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Answer #1

Variable cost varies with number of units produced or sold thus it is a relevant cost in decision making as it is considered as an incremental cost whereas fixed cost remains constant irrespective of number of units thus it is irrelevant to decision making .

Thus fixed overhead cost will not be considered while making decision as to special offer as same is irrelevant.

Fixed overhead cost per Machine hour = 540000/90000 = $ 6 per MH      [7500 per month or 7500*12 =90000 per year]

Variable overhead cost per machine hour = 10- 6 = $ 4 per machine hour

Special offer 1)Alan co.

Special offer price 15
less:Direct material 5.60
Direct labor 7.50
Variable overhead (.25*4) 1
Total cost per unit (14.1)
Incremental profit/ /(loss) per unit .90
Total incremental profit .90*20000= 18000

Special offer 2)Shala corp :

Special offer price 18
less:Direct material 8.15
Direct labor 7.50
Variable overhead (.50*4) 2
Total cost per unit (17.65)
Profit /(loss) per unit .35
Total profit .35*7500= 2625
less:set up cost -3750
Equipment cost -6250
Total incremental profit/ (loss) -7375

Since Acceptance of Alan co.special offer results in incremental profit of $ 18000 ,same should be accepted .Shala corp. offer should be rejected as same results in incremental loss of 7375

b)

Qualitative aspects to be considered :

a)Whether regular sales are affected on acceptance of either offer or both offer.(Potential loss of regular customer)

b)Whether special offer is repeatative or a one time offer

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