Question

Louis Luggage produces many different types and sizes of luggage. Their best seller, the Weekend Warrior, sells for $140. Louis has been asked by Macrosoft, Inc. to produce 2,000 of the Weekend Warrior with a specially designed fingerprint security lock and with the Macrosoft company logo. These will be given to Macrosoft employees who must travel frequently for work. Macrosoft has offered to pay $120 per suitcase. Louis’ costs related to the Weekend Warrior consist of variable costs per unit of $50 and fixed costs per unit of $35 of which $9 are unavoidable. In addition, Louis will encounter additional variable costs of $10 per unit for the security lock component and $4,000 as a one-time fixed cost for the Macrosoft label.

A. What is the operating income generated by the special order?

B. Should the special order be accepted? Why or why not?

C. What are three other considerations that Louis, or any company, should think about when choosing whether to accept a special order?

Answer 1

Operating income generated by Special Order

A.Sales quantuty		2000
B.Sales revenue	2000*120	240000
C.Variable cost	50*2000	100000
D.Additional variable cost	2000*10	20000
F. One time fixed cost		4000
G.fixed cost	2000*35	70000*
H.Total cost	C+D+F+G	194000
I.Operating Income	A-H	46000

* The total fixed cost is charged to special order inorder to calculate operating revenue.

B. Wheter special order should be accepted or not?

Total relevent cost incuured to process special order

Sales	120*2000	240000
Variable cost	(50+10)*2000	120000
One time fixed cost		4000
Avoidable fixed Cost	(35-9)*2000	52000
Net benefir from special order	240000-120000-4000-52000	64000

*This is done on the assumption that comapny need not to forgone its existing demand, otherwise also needs to consider contribition forgone from tjat.

3. Company aslo consider other non financial factors like

Whether existing market share/ customers will lost due to special order

Whether employees may need to work overtime and their reaction, capabilities of busienss and retention of suppliers/custoomers etc