Lorraine manufactures a single product with the following full unit costs for 3,000 units: A company...

Lorraine manufactures a single product with the following full unit costs for 3,000 units:

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?

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

Solutions

Expert Solution

Variable manufacturing overhead : 120*40% = $ 48

Fixed manufacturing : [120-48]*3000= 216000

Variable selling : 40*.60= $ 24

Fixed selling : [40-24]*3000 = 48000

Administrative expenses :variable = 20*10% = 2

Fixed Administrative expenses : [20-2]*3000= 54000

Total variable cost :80 direct material +40 direct labor +48+24+2= 194

Fixed cost : 318000

sales [3200*550]	1760000
less:Variable cost [194*3200]	(620800)
contribution	1139200
fixed cost	(318000)
net income	821200

Fixed cost will be incurred whether offer is accpeted or not so it is irrelevant .Variable selling cost will not be incurred

Total variable costexcluding selling cost: 80+40+48+2 = $ 170

Profit will increase by : 500[300-170] = $ 65000

Variable cost : 500*170 = $85000

Total sales : 85000+80000 = 165000

sales price minimum : 165000/500 = $ 330 per unit

A)Increase in market share :whether the existing market share is affected or it will increase the market share/.

B)special order is repeatable or profitable in long run.

ekkarill92 answered 1 year ago

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