Question

In: Accounting

The Immanuel Company has the capacity to produce 75,000 bins per month. - Fixed production costs...

The Immanuel Company has the capacity to produce 75,000 bins per month.

- Fixed production costs are $120,000 per month, and the company currently sells 70,000 bins at $13 each based on the following unit costs:

- Variable production cost $5.60 - Fixed production costs 1.60[Based on capacity]

- Variable selling expense 1.00 The Immanuel Co has just obtained a request for a special order of 6,000 bins to be shipped at the end of the month at a selling price of $10 each.

The price and the terms are open to negotiation. If the special order is accepted, the company will avoid the selling expenses, but shipping costs of $0.30 per unit will have to be added.

Required: 1. List 5 non-financial/financial issues that should be considered before accepting or rejecting this order. Should they accept the order? With what conditions?

2. If Immanuel accepts the special order as is, what will be the increase in monthly net operating income? 3. What is the lowest price Immanuel should accept on this special order without losing money 4. If Immanuel had regular sales of 71,000 bins per month, what would be the change in monthly operating income if it accepted the special order?

Expert Solution

1. List 5 non-financial/financial issues that should be considered before accepting or rejecting this order. Should they accept the order? With what conditions?

improving staff morale, making it easier to recruit and retain employees
developing the capabilities of your business, such as building skills and experience in new areas or strengthening management systems
Ensuring supply which related to the reliability of the supplier and the quality of its offering;
Production capacity which related to subcontracting some of the operation if there are increases in demand and the company does not have sufficient capacity to do it itself;
Competitive advantages which related to secret the company try to keep to block other company from gaining information about the item

Note: 1 : Fixed costs are irrelevant in deceision making for special order.

Note: 2 : Opportunity cost is the contribution foregone on existing sales products for accepting new orders.

=1,000 units * [$13 sell price - $5.60 Variable production cost - $1.00 Variable Selling Expense]

=1,000 units * $6.40

=$6,400

Yes, they should accept the order, because it's result in increase in the profit of = $18,200.

With one condition that it can't resale below $13 in the open market to prevent price war for our own product.

2. If Immanuel accepts the special order as is, what will be the increase in monthly net operating income?

it's result in increase in the net operating income of = $18,200.

3. What is the lowest price Immanuel should accept on this special order without losing money

Lowest price = Current Price - (Additional net operating income / Oredr Quantity)

Lowest price = $10 - ($18,200 - 6,000 units)

Lowest price = $10 - $3.03

Lowest price = $6.97

4. If Immanuel had regular sales of 71,000 bins per month, what would be the change in monthly operating income if it accepted the special order?

If it had regular sale of 71,000 units then opportunity cost would be as follows.

=2,000 units * [$13 sell price - $5.60 Variable production cost - $1.00 Variable Selling Expense]

=2,000 units * $6.40

=$12,800.

Net operating income would be decrease by $12,800 which result in new net operating income of $18,200 - $12,800 = $5,400.

This order still acceptable since, it result in $5,400 additional revenue.

ekkarill92 answered 2 years ago

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