Question

The following quarterly financial data are for Pneumatic Inc., a maker of compressors. On average, Pneumatic makes 20,000 compressors each quarter.

Per Unit Total Qtrly Data at 20,000 Compressors

Sales revenue $300 $6,000,000

- Variable Costs 100 2,000,000

=Contribution margin $200 $4,000,000

- Fixed Costs 3,500,000

=PROFIT $500,000

Pneumatic received an offer from a one-time customer to purchase 5,000 compressors this coming quarter for $275 per unit. Pneumatic can produce up to 30,000 units a quarter, so the special order would not affect regular customer sales. Variable costs per unit will remain at $100. This special order will have no effect on fixed costs.

REQUIREMENTS:

A.Using differential analysis, determine whether Pneumatic would be better off rejecting the special order (Alternative 1) or accepting the special order (Alternative 2). B.Summarize the result of accepting the special order. C. Assume Pneumatic is approached with the same special offer, but has limited capacity and can only produce up to 20,000 units per quarter. Thus, any special orders will result in reduced sales to regular customers. Using the differential analysis 1, determine whether Pneumatic would be better off rejecting (Alternative 1) or accepting (Alternative 2) the special order. D. Summarize the result of accepting the special order in requirement c.

Answer 1

A.
Differential analysis	(Alternative 1)	(Alternative 2)
Particulars	Rejecting special order	Accepting special order
Sales -regular	$6,000,000	$6,000,000
Sales -Special order (5,000 * $275)		1,375,000
Total sales	$6,000,000	$7,375,000
Variable cost (25,000*$100)	2,000,000	2,500,000
Contribution	$4,000,000	$4,875,000
Ficed cost	3,500,000	3,500,000
Profit	$500,000	$1,375,000
So accepting special order is best option
B. Extra profit of $ 875,000
C.
Differential analysis	(Alternative 1)	(Alternative 2)
Particulars	Rejecting special order	Accepting special order
Sales -regular	$6,000,000	$4,500,000
Sales -Special order (5,000 * $275)		1,375,000
Total sales	$6,000,000	$5,875,000
Variable cost (20,000*$100)	2,000,000	2,000,000
Contribution	$4,000,000	$3,875,000
Ficed cost	3,500,000	3,500,000
Profit	$500,000	$375,000
Regular sales 15,000 units because of limited capacity
So, not to take special order
D. Profit reduce by $125,000