Question

Waterways Continuing Problem 07 (Part 1)

Waterways mass-produces a special connector unit that it normally sells for $3.90. It sells approximately 32,700 of these units each year. The variable costs for each unit are $2.50. A company in Canada that has been unable to produce enough of a similar connector to meet customer demand would like to buy 14,500 of these units at $2.80 per unit. The production of these units is near full capacity at Waterways, so to accept the offer from the Canadian company would require temporarily adding another shift to its production line. To do this would increase variable manufacturing costs by $0.30 per unit. However, variable selling costs would be reduced by $0.20 a unit.

An irrigation company has asked for a special order of 2,100 of the connectors. To meet this special order, Waterways would not need an additional shift, and the irrigation company is willing to pay $3.40 per unit.

1. What are the consequences of Waterways agreeing to provide the 14,500 units to the Canadian company? Would this be a wise “special order” to accept?

Waterways should or should not accept the special order because net income would increase or decrease by $_________?

2. Should Waterways accept the special order from the irrigation company?

Waterways should or should not accept the special order because net income would increase or decrease by $_________?

3. What would be the consequences of accepting both special orders?

Accepting both offers would increase or decrease net income by $________?

Answer 1

Answer (a)

Present Gross profit of the company
Sale (unit)		32,700
Sale price/unit		$3.90
Sale amount		$127,530
Less:- Variable Cost	'2.50*32,700	81750
Gross Profit		45780
If Company accept Canadian Co. Order
		Present	additional
Sale (unit)		32700	14500
Sale price/unit		3.90	2.80
Sale amount		$127,530	40600
Variable Cost	'2.50*32,700	81750
Additional variable cost	'2.80*14500		40600
Less Saving in Selling exp	'0.20*14500		2900
Gross Profit		45780	2900
Total Gross profit of the company will be 45780+2900 = $ 48680.
So company may be accept the proposal.

Answer -b

If Company accept Irrigation Co. Order
		Present	additional
Sale (unit)		32700	2100
Sale price/unit		3.90	3.40
Sale amount		$127,530	7140
Variable Cost	'2.50*32700	81750
Additional variable cost	'2.50*2100		5250
Gross Profit		45780	1890
Total Gross profit of the company will be 45780+1890= 47670
So company may be accept the proposal.

Answer (c)

If Company accept Canadian & Irrigation Co. Order
			Canadian	Irrigation
		Present	additional	additional
Sale (unit)		32700	14500	2100
Sale price/unit		3.90	2.80	3.40
Sale amount		$127,530	40600	7140
Variable Cost	'2.50*32700	81750
Additional variable cost	'2.80*14500		40600
Additional variable cost	'2.50*2100			5250
Less Saving in Selling exp	'0.20*14500		2900
Gross Profit		45780	2900	1890
Total Gross profit of the company will be 45780+2900+1890 = 50570.
So company may be accept the proposal.

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