Question

Andreasen Corporation manufactures thermostats for office buildings. The following is the cost of each unit:

Materials	$	18.90
Labor		7.90
Variable overhead		2.90
Fixed overhead ($1,079,100 per year; 109,000 units per year)		9.90
Total	$	39.60

Simpson Company has approached Andreasen with an offer to buy 7,000 thermostats at a price of $39 each. The regular price is $59. Andreasen has the capacity to produce the 7,000 additional units without affecting its current production of 109,000 units. Simpson requires that each unit use its branding, which requires a more expensive label, resulting in an additional $1.90 per unit material cost. The labor cost of affixing the label will be the same as for the current models. The Simpson order will also require a one-time rental of packaging equipment for $59,200.

Required:

a. Prepare a schedule to show the impact of filling the Simpson order on Andreasen's profits for the year. (Enter your answers in thousands rounded to 1 decimal place. (i.e., 5,400,400 should be entered as 5,400.4). Select option "higher" or "lower", keeping Status Quo as the base. Select "none" if there is no effect.)

	(All Costs in Thousands of Dollars) Status Quo 109,000 Units Alternative 116,000 Units Difference Sales revenue Less variable costs: Materials Labor Variable overhead Total variable cost $0.0 $0.0 Contribution margin Less: Fixed costs Operating profit(loss)

b. Do you agree with the decision to accept the special order?

	No
	Yes

c. Considering only profit, determine the minimum quantity of thermostats in the special order that would make it profitable, assuming capacity is available.

	Quantity of thermostats units

Answer 1

Solution a:

Incremental Analysis - Special Order - Andreasen Corporation (All Costs in Thousands of Dollars)
Particulars	Status Quo 109,000 Units	Alternative 116,000 Units	Difference
Sales revenue	$6,431.0	$6,704.0	$273.0	Higher
Less variable costs:
Materials	$2,060.1	$2,205.7	$145.6	Higher
Labor	$861.1	$916.4	$55.3	Higher
Variable overhead	$316.1	$336.4	$20.3	Higher
Total variable cost	$3,237.3	$3,458.5	$221.2	Higher
Contribution margin	$3,193.7	$3,245.5	$51.8	Higher
Less: Fixed costs	$1,079.1	$1,138.3	$59.2	Higher
Operating profit(loss)	$2,114.6	$2,107.2	-$7.4	Lower

Solution b:

As there is net financial disadvantage of $7,400 on acceptance of special order, therefore special order should not be accepted.

Solution c:

Variable cost per unit for special order = ($18.90 + $1.90) + $7.90 + $2.90 = $31.60

Price for special order = $39

Contribution margin per unit for special order = $39 - $31.60 = $7.40 per unit

Additional fixed of special order = $59,200

minimum quantity of thermostats in the special order that would make it profitable = Fixed cost / contribution margin per unit = $59,200 / $7.40 = 8000 units