Question

Print Fine Company produces and sells ribbon cartridges for electronic printers. The ribbons are sold to computer dealers for $5.35 each. The firm controller has determined the following costs are currently required for the ribbons:

Fixed costs per month are $27,000, of which 60% is manufacturing overhead.

Variable costs per ribbon:

                 Direct materials                        $2.00

                 Direct labor                             0.40

                 Manufacturing overhead            0.35

                 Selling                                    0.05

The variable selling costs are freight charges incurred to ship the ribbons to the retail outlets. The firm has the capacity to produce 30,000 ribbons per month without working overtime, although the current production and sale level is only 25,000 ribbons.

An importer in china has offered to buy 8,000 ribbons at $4.75 each. The importer would pay 80% of the freight costs, but Print Fine estimates that additional selling and administrative expenses of $900 would be required with the offer. Assume that the firm can work overtime to produce any ribbons required in excess of its production capacity of 30,000. Direct labor costs for ribbons produced during overtime would increase by 40%, while direct marterials costs for ribbons produced during overtime would decline by 10% as a result of taking additional discount from the supplier.

Prepare a relevant analysis to evaluate the effect of this special order on Kirk’s profitability using the below template.

Item	Current Situation	Situation with the special order
Sales revenue	$	$
Direct materials
Direct labor
Variable overhead
Variable marketing and administrative
Contribution margin	$	$
Fixed Manufacturing
Fixed Marketing and Administrative
Operating profit	$	$

Answer 1

Item	Current Situation($)	Situation with the special order($)
Sales revenue Direct materials Direct labor Variable overhead Variable marketing and administrative	133,750 -50,000 -10,000 -8,750 -1,250	171,750 -65,400 -13,680 -11,550 -2,230
Contribution margin	63,750($)	78,890($)
Fixed manufacturing Fixed marketing and administrative	-16,200 -10,800	-16,200 -10,800
Operating profit	36,750($)	51,890($)

Sales revenue of current situation = $ 5.35 x 25,000=$ 133,750

Direct materials in current situation=$ 2 x 25,000=$ 50,000

Direct labor in current situattion=$ 0.40 x 25,000= $ 10,000

Variable overhead in current situation= $ 0.35 x 25,000=$ 8,750

Variable marketing and administrative in current situation=0.05 x 25,000= $1,250

Fixed manufacturing overheads in current situation=$ 27,000 x 60 %=$ 16,200

Fixed marketing and administrative in current situation=$ 27,000 x 40 % =$ 10,800

Sales revenue in situation with the special order =( 8,000 x $ 4.75)+133,750= $ 38,000+ $133,750= $ 171,750

Direct materials in situation with the special order = (3,000 x $ 1.8) + 30,000 x $ 2= $5,400+ $60,000= $ 65,400

Direct labor in situation with special order = ( 30,000 x $ 0.40 ) + (3,000 x $ 0.56)= $ 12,000 + $ 1,680 = $ 13,680

Variable overhead in situation with special order = $ 0.35 x 33,000 = $ 11,550

Variable marketing and administrative in situation with special order =((0.05-80%) x 8,000)+ $1,250 + $ 900=(.01 x  8,000)+ 2,150 = $ 2,230

Fixed manufacturing overheads= $ 16,200

Fixed marketing and administrative=$ 10,800