Question

In: Finance

Solomon Company manufactures a personal computer designed for use in schools and markets it under its...

Solomon Company manufactures a personal computer designed for use in schools and markets it under its own label. Solomon has the capacity to produce 31,000 units a year but is currently producing and selling only 14,000 units a year. The computer’s normal selling price is $1,610 per unit with no volume discounts. The unit-level costs of the computer’s production are $480 for direct materials, $230 for direct labor, and $190 for indirect unit-level manufacturing costs. The total product- and facility-level costs incurred by Solomon during the year are expected to be $2,170,000 and $817,000, respectively. Assume that Solomon receives a special order to produce and sell 3,020 computers at $1,210 each.

a: What is the contribution to profit?

b. Should solomon accept or reject the offer?

Solutions

Expert Solution

Answer lead:
Solomon company's contribution i.e selling price minus variable costs will give an idea of contribution towards fixed costs.
Further, the company's spare capacity has to be analysed to decide on accepting or rejecting the special order
Inputs:
Maximum yearly capacity 31000
Current annual production 14000
Selling price per unit- SP $1610
Direct materials cost per unit- DM $480
Direct labour cost per unit- DL $230
Indirect unit level manufacturing cost per unit-IDL $190
Yearly product level costs $2,170,000
Yearly facility level costs $817,000
Special order selling price $1210
Special order quantity - units 3020
Working:
a) Contribution to profit:
Contribution per unit= Selling price- Variable costs
Variable costs in $ DM+DL+IDL
900
Special order selling price in $ 1210
Contribution per unit in $= 1210-900
310
Total contribution to profit in $= Contribution per unit * Special order quantity
310*3020
936200
Special order's Contribution to profit in $ 936200
b) Solomon company's decision:
Idle capacity= Maximum capacity- current production
31000-14000
Yearly Idle capacity in units 17000
Solomon can accept the special order because he has idle capacity to produce 3020 units.
Further, the special order gives $936,200 as contribution towards profit.
This contribution can be used by Solomon company towards their recovery of fixed costs namely product level costs & facility level costs..

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