Question

Sherene Nili manages a company that produces wedding gowns. She produces both a custom product that is made to order and a standard product that is sold in bridal salons. Her accountant prepared the following forecasted income statement for March, which is a busy month:

	Custom Dresses			Standard Dresses			Total
Number of dresses		10			20			30
Sales revenue	$	55,000		$	35,000		$	90,000
Materials	$	11,000		$	9,000		$	20,000
Labor		21,000			10,000			31,000
Machine depreciation		700			400			1,100
Rent		5,200			3,800			9,000
Heat and light		1,100			700			1,800
Other production costs								3,800
Marketing and administration								8,700
Total costs							$	75,400
Operating profit							$	14,600

Ms. Nili already has orders for the 10 custom dresses reflected in the March forecasted income statement. The depreciation charges are for machines used in the respective product lines. Machines depreciate at the rate of $1 per hour based on hours used, so these are variable costs. In March, cutting and sewing machines are expected to operate for 1,100 hours, of which 700 hours will be used to make custom dresses. The rent is for the building space, which has been leased for several years at $9,000 per month. The rent, heat, and light are allocated to the product lines based on the amount of floor space occupied.

A valued customer, who is a wedding consultant, has asked Ms. Nili for a special favor. This customer has a client who wants to get married in early April. Ms. Nili's company is working at capacity and would have to give up some other business to make this dress. She can't renege on custom orders already agreed to, but she can reduce the number of standard dresses produced in March to 10. Ms. Nili would lose permanently the opportunity to make up the lost production of standard dresses because she has no unused capacity for the foreseeable future. The customer is willing to pay $29,000 for the special order. Materials and labor for the order will cost $7,000 and $11,000, respectively. The special order would require 180 hours of machine time. Ms. Nili's company would save 200 hours of machine time from the standard dress business given up. Rent, heat and light, and other production costs would not be affected by the special order.

Required:

a-1. Calculate the differential operating profit (loss). (Select option "increase" or "decrease", keeping Without special order as the base. Select "none" if there is no effect.)

a-2. From an operating profit (loss) perspective for March, should Ms. Nili accept the order?

	Yes
	No

b. What is the minimum price Ms. Nili should accept to take the special order?

Answer 1

Answer for 1)

Here,it is assumed that no standard dresses are produced from remaining 20 hours(200hours-180hours) and also other production costs and marketing and animation costs remain constant.

	Costing dresses ($)	Standard dresses ($)	Total
Sales revenue	84000 ($55000+$29000)	17500 ($35000×10/20)	101500
Materials	18000 ($11000+$7000)	4500 ($9000×10/20)	22500
Labor	32000 ($21000+$11000)	5000 ($10000×10/20)	37000
Machine depreciation	880 [(700+180)hours×$1]	200 (200hours×$1)	1080
Rent	5200	3800	9000
Hear and light	1100	700	1800
Other production costs			3800
Marketing and administration			8700
Total costs			83880

Total profit=$101500-$83880=$17620

Increase or decrease in profit:$17620-$14600

=$3020 increase in profit.

Answer for 2 a)

Yes.

I think mr.nili must accept the offer as it boosts the profit by $3020.

Answer for 2 b)

Minimum price that ms.nili should accept to take special order:

$29000-$3020*=$25980.

*$3020 is taken as after taking it still ms.nili must be able to get the profit of $14600.