Question

Rome Metals Cost Breakdown	Per Unit
Direct materials	$8
Direct labor	$45
Variable overhead	$9
Fixed overhead	$14
Shipping Cost	$2
Total Per Unit	$78

Rome Metals a US based firm located in Rome, Georgia makes metal brackets used in the construction of warehouse shelving. The firm has a practical capacity of 42,000 units and for the past several years has produced at a constant volume of 35,000 units/year. Rome Brackets are priced at $92/unit. The manufacturing costs incurred to make a bracket at the 35,000 unit level is shown above. Note that the $2/unit shipping cost is included in the manufacturing costs breakdown. An order for 10,000 has been received from a new customer - Fedex Logistics Services - but at a required price of only $78/unit. Fedex has agreed to pick up the order from the Rome facility itself saving Rome Metals the shipping fee. Due to capital constraints Rome Metals cannot adjust its practical capacity nor does the firm have any potential outsourcing partners. Assuming no loss of existing customer goodwill, should Rome Metals accept the offer from Fedex Logistics Services.

a) Yes, Rome Metals Profit will Increase by $154,000

b) Yes, Rome Metals Profits will Increase by $160,000

c) Yes, Rome Metals Profits will Increase by $76,000

d) No, Rome Metals Profits Will Be Reduced by $70,000

e) Yes, Rome Metals Profits Will Increase by $70,000

f) No, Rome Metals Profits Will be reduced by $30,000

Answer 1

Solution:

Current Situation of the company

	Current Situation
	Total $ (35000 Units)	Per Unit
Sales	3,220,000.00	92.00
Variable Costs
Direct Material	280,000.00	8.00
Direct Labour	1,575,000.00	45.00
Variable Overhead Expenses	315,000.00	9.00
Shipping Cost	70,000.00	2.00
Total Variable Costs	2,240,000.00	64.00
Contribution = Sales - Total Variable Cost	980,000.00	28.00
Fixed Costs
Fixed Overheads	490,000.00	14.00
Profit = Contribution - Fixed Cost	490,000.00	14.00

As the practical capacity of the Rome Metals is 42,000 units, the sales to the existing customers will be reduced to 32,000 units if it accepting the order from Fedex Logistics Services

	Existing Customers (32000 Units)		New Order (10000 Units)		Total (42000 Units)
	Total $ (32000 Units)	Per Unit	Total $ (10,000 Units)	Per Unit
Sales	2,944,000.00	92.00	780,000.00	78.00	3,724,000.00
Variable Costs	-		-		-
Direct Material	256,000.00	8.00	80,000.00	8.00	336,000.00
Direct Labour	1,440,000.00	45.00	450,000.00	45.00	1,890,000.00
Variable Overhead Expenses	288,000.00	9.00	90,000.00	9.00	378,000.00
Shipping Cost	64,000.00	2.00	-	-	64,000.00
Total Variable Costs	2,048,000.00	64.00	620,000.00	62.00	2,668,000.00
Contribution = Sales - Total Variable Cost	896,000.00	28.00	160,000.00	16.00	1,056,000.00
Fixed Costs			-		-
Fixed Overheads	490,000.00	15.31	-	-	490,000.00
Profit = Contribution - Fixed Cost	406,000.00	12.69	160,000.00	16.00	566,000.00

If Rome Metals accept the new order its Profits will increase by $76,000 ($566,000 - $490,000)

Should Rome Metals accept the offer from Fedex Logistics Services?

Correct Option is Option C: Yes, Rome Metals Profits will Increase by $76,000