Question

Fairmount Travel Gear produces backpacks and sells them to vendors who sell them under their own label. The cost of one of its backpacks follow:

Materials	$18.50
Labor	12.50
Variable Overhead	5.50
Fixed overhead ($2,957,500 per year; 455,000 units per year)	6.50
Total	$43.00

Riverside Discount Mart, a chain of low-price stores, has asked Fairmount to supply it with 24,000 backpacks for a special promotion Riverside is planning. Riverside has offered to pay Fairmount a unit price of $47 per pack. The regular selling price is $65. The special order would require some modification to the basic model. These modifications would add $4.50 per unit in material cost, $2.00 per unit in labor cost, and $1.00 in variable overhead cost. Although Fairmount has the capacity to produce the 24,000 units without affecting its regular production of 455,000 units, a one-time rental of special testing equipment to meet Riverside’s requirements would be needed. The equipment rental would be $87,000 and would allow Fairmount to test up to 55,000 units.

a. Prepare a schedule to show the impact of filling the Riverside order on Fairmont’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.)

	Status Quo 455,000 units	Alternative 479,000 units	Difference
Sales Revenue
Less: Variable Costs:
Materials
Labor
Variable Overhead
Total Variable Cost
Contribution Margin
Less: Fixed Costs
Operating Profit (loss)

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

O	Yes
O	No

c. Considering only profit, determine the minimum quantity of backpacks in the special order that would make it profitable. (Do not round intermediate calculations.)

the minimum quantity of backpacks

units

Answer 1

A.

	Status Quo 455000 units	24000 Riverside offer	Total 479000 units (alternative)	Difference
Sales	29575	1128	30703	higher
Less: variable cost
material	8417.5	552	8969.5	higher
Labour	5687.5	348	6035.5	higher
Variable overhead	2502.5	156	2658.5	higher
Total variable cost	16607.5	1056	17663.5	higher
Contribution	12967.5	72	13039.5	higher
Fixed cost	2957.5	87	3044.5	higher
Operating profit/(loss)	10010	(15)	9995	lower

B. No as operating profit has decreased due to acceptance of offer.

C. Minimum quantity that will make special offer profitable is

Fixed Cost of special order/ contribution per unit of special order

=87000/$3= 29000 backpacks from special order