Question

Andreasen Corporation manufactures thermostats for office buildings. The following is the cost of each unit:

Materials	$	18.50
Labor		7.50
Variable overhead		2.50
Fixed overhead ($997,500 per year; 105,000 units per year)		9.50
Total	$	38.00

Simpson Company has approached Andreasen with an offer to buy 10,000 thermostats at a price of $35 each. The regular price is $55. Andreasen has the capacity to produce the 10,000 additional units without affecting its current production of 105,000 units. Simpson requires that each unit use its branding, which requires a more expensive label, resulting in an additional $1.50 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 $38,200.

Required:

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

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

Since there is spare capacity, only incremental costs are relevant for the special order as there will be no loss of regular sales
Schedule
Revenue from special order	350,000
Costs:
Material	200,000
Labor	75,000
Variable Overhead	25,000
Rent of Equipment	38,200
Total costs	338,200
Profit	11,800
Yes, the order should be accepted since incremental profit
c.Minimum quantity = Increase in fixed costs/Contribution margin per unit
=38200/(35-20-7.5-2.5)
7640	units

Break even level = 7640 units,  Minimum units for profit = 7641 units