Question

30. Rayburn's Tents makes backpacking tents. It has the capacity to produce 10,000 tents per year and currently is producing and selling 7,000 tents. Normal selling price for a tent is $470. Variable costs are $100 for direct materials, $200 for direct labor, and $25 for other manufacturing costs. Fixed costs of $80 are allocated to each tent. Rayburn's has received a special order for 1,500 tents at $340 each.

a. Should Rayburn's accept the special order? Why? Write a short sentence.
b. Support your answer with appropriate computations that show how the order will affect Rayburn's income.

Answer 1

• Answer ‘a’

YES, the special order should be accepted.

This is because any order is acceptable if the offered price is more than the relevant cost.

Relevant cost includes variable manufacturing cost + contribution margin lost + avoidable fixed costs.

Relevant cost here will be ONLY variable manufacturing cost of $ 325 because there is sufficient capacity to fulfil the 1500 units of special order without any normal sales being affected and there’s no avoidable fixed cost to consider.

• Answer ‘b’

	Without special order	With Special Order	Increase (Decrease in Income)
Units sold	7,000	8,500
Normal Sales	$          3,290,000	$          3,290,000
Special order sale	$                          -	$              510,000
Total Revenues	$          3,290,000	$          3,800,000	$                510,000
Costs:
Direct material	$              700,000	$              850,000
Direct Labor	$          1,400,000	$          1,700,000
Other manufacturing cost	$              175,000	$              212,500
Total Cost [excluding fixed cost]	$          2,275,000	$          2,762,500	$               (487,500)
Net Benefit	$          1,015,000	$          1,037,500	$                   22,500

Hence, as shown above, if special order is accepted, the Net Income will increase by $ 22,500