Question

Lorraine manufactures a single product with the following full unit costs for 3,000 units: Direct materials $80 Direct labor 40 Manufacturing overhead (40% variable) 120 Selling expenses (60% variable) 40 Administrative expenses (10% variable) 20 Total per unit $300 A company recently approached Lorraine with a special order to purchase 500 units for $300. Lorraine currently sells the models to dealers for $550. Capacity is sufficient to produce the extra 1,000 units. No selling expenses would be incurred on the special order. Required: a. Ignoring the special order, determine Lorraine’s profit on production and sales of 3,200 units. Ignore taxes in these analyses. b. Should Lorraine accept the special order if its goal is to maximize short-run profits? Determine the impact on profit of accepting the order. c. Determine the minimum price Lorraine would want, to increase before tax profits by $80,000 on the special order. d. When making a special order decision, what non-quantitative (qualitative) aspects of the decision should Lorraine consider?

Answer 1

A. Profit from sales of 3200 units

particulars	per unit($) variable	cost in $
Direct materials	80	256000
Direct labour	40	128000
Manufacturing overhead variabe.=40%=120*40= $48 48*3200units=$128000	48	128000
total direct variable cost	168	512000
fixed manuf.oh.= 120*60%= $72*3000units =216000 dollars		216000
Administrative exp variabe $20*10%=2 ,3200units*2=$6400 fixed= $20*90%=$18, $18*3000units=$54000		60400
selling expenses variable = $40*60%=$24 , $24*3200units=$76800 fixed= $40*40%= $16*3000units= $48000		124800
TOTAL COST OF 3200 UNITS		913200
LESS SALES REVENUE OF 3200 UNITS	550	1760000
PROFIT		846800

B. PROFIT FROM SPECIAL ORDER AND ITS IMPECT ON PRESENT PROFIT {# INDICATESREFER ABOVE TABLE}

PARTICULARS	AMOUNT ($)
CALCULATION OF CONTRIBUTION FOR 500 UNITS
SALES REVENUE($300*500)	150000
DIRECT VARIABLE COST# ($168* 500UNITS)	(84000)
VARIABLE ADMINISTRATIVE EXPENSES#($2*500)	(1000)
VARIABLE SELLING EXPENSES#($24*500)	(12000)
CONTRIBUTON	53000
CONTRIBUTION PER UNIT FOR FULL CAPACITY UNITS I.E. 3000 UNITS= $550-$168#= $382*3000	1146000
TOTAL CONTRIBUTION	1199000
LESS FIXED COST#
MANUF OVERHEAD#	216000
ADMINISTRATIVE EXPENSES#	54000
SELLING EXPENSES#	48000
PROFIT	881000

THE PROFIT WILL INCREASE FROM 846800^# TO 881000 DOLLARS.IF THE LORRIAN HAS GOAL TO MAXIMIZE SHORT TERM PROFITS IT SHOULD ACCEPT THE OFFER.

C. IF LORRIAN WANT TO INCREASE THE PROFIT BY $80000 IT SHOULD ANALYSE AS FOLLOWING

TOTAL FIX COST FOR MAXIMUM 4000UNITS

MANUFACTURING OH	$216000
ADMINISTRATIVE EXPENSES	$54000
SELLING EXPENSES	$48000
TOTAL	$318000

VARIABLE COST IS $168 PER UNIT

THE LORRIAN HAVE TO EARN TOTAL $846800 (EXISTING PROFIT) + $80000 =$ 926800

REQUIRED PROFIT	$926800
FIXED COST	($318000)
CONTRIBUTION REQUIRED	$608800
/VARIABLE COST PER UNIT	$168
NUMBER OF UNITS MUST BE SOLD (MINIMUM) FOR REQUIRED PROFIT =$608800/$168	3624 (rounded off)