Question

Waterways Continuing Problem 07 (Part 1) Waterways mass-produces a special connector unit that it normally sells for $4.00. It sells approximately 38,100 of these units each year. The variable costs for each unit are $2.20. A company in Canada that has been unable to produce enough of a similar connector to meet customer demand would like to buy 14,700 of these units at $2.50 per unit. The production of these units is near full capacity at Waterways, so to accept the offer from the Canadian company would require temporarily adding another shift to its production line. To do this would increase variable manufacturing costs by $0.30 per unit. However, variable selling costs would be reduced by $0.20 a unit. An irrigation company has asked for a special order of 1,800 of the connectors. To meet this special order, Waterways would not need an additional shift, and the irrigation company is willing to pay $3.10 per unit.

What are the consequences of Waterways agreeing to provide the 14,700 units to the Canadian company? Would this be a wise “special order” to accept? Waterways should notshould accept the special order because net income decreasesincreases by $ . Should Waterways accept the special order from the irrigation company? Waterways should notshould accept the special order because net income decreasesincreases by $ . What would be the consequences of accepting both special orders? Accepting both special orders would increasedecrease net income by $ .

Answer 1

Solution:

1)

Present gross profit of the company

Sale (unit)		38,100
Sale price/unit		4.00
Sale amount		152,400
Variable cost	38,100*2.20	83,820
Gross profit		68,580

If company accept the Canadian company order

		Present	Additional
Sale(unit)		38,100	14,700
Sale price/unit		4.00	2.50
Sale amount		152,400	36,750
Variable cost	2.20*38,100	83,820
Additional variable cost	2.50*14,700		36,750
Less: Saving in selling exp	0.20*14,700		2,940
Gross profit		68,580	2,940

Total gross profit of the company will be $68,580 +$2,940 =$71.520

So,company mey be accept the proposal

2)

If company accept Irrigation company order:

		Present	Additional
Sale(unit)		38,100	1,800
Sale price/unit		4.00	3.10
Sale amount		152,400	5,580
Variable cost	2.20*38,100	83,820
Additional variable cost	2.20*1,800		4,140
Gross profit		68,580	1,440

Total gross profit of the company will be $68,580+$1,440 = $70,020

So, company may be accept the proposal

3)

If company accept canadian & Irrigation co order

			Canadian	Irrigation
		Present	Additional	Additional
Sale(unit)		38,100	14,700	1,800
Sale price/unit		4.00	2.50	3.10
Sale amount		152,400	36,750	5,580
Variable cost	2.20*38,100	83,820
Additional variable cost	2.50*14,700		36,750
Additional variable cost	2.20*1,800			4,140
Less: Saving in selling exp	0.20*14,700		2,940
Gross profit		68,580	2,940	1,440

Total gross profit of the company will be

=$68,580+$2,940+$1,440

=$72,960

So company may be accept the proposal

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