Question

The Talbot Company makes a single product called a Wheel. The company has the capacity to produce 40,000 Wheels per year. Per unit costs to produce and sell one Wheel at that activity level are:

Direct materials	$20
Direct labor	$10
Variable manufacturing overhead	$5
Fixed manufacturing overhead	$7
Variable selling expense	$8
Fixed selling expense	$2

The regular selling price for one Wheel is $60. A special order has been received at Talbot from the Fairview Company to purchase 8,000 Wheel next year at 15% off the regular selling price. If this special order were accepted, the variable selling expense would be reduced by 25%. However, Talbot would have to purchase a specialized machine to engrave the Fairview name on each Wheel in the special order. This machine would cost $120,000 and it would have no use after the special order was filled. The total fixed cost, both manufacturing and selling, are constant within the relevant range of 30,000 to 40,000 Wheels per year. Assume direct labor is variable cost.

If Talbot can expect to sell 32,000 Wheels next year through regular channels, what is minimum price it should accept for the special order?

$50.00

$51.50

$42.50

$41.00

If Talbot can expect to sell 32,000 Wheels next year through regular channels and the special order is accepted at 15% off the regular selling price, the effect on net operating income next year due to accepting this order would be a:

$52,000 increase

$80,000 increase

$24,000 decrease

$68,000 increase

If Talbot could sell 37,000 Wheels next year through regular channels and the special order is accepted for 15% off the regular selling price, the effect on net operating income next year due to accepting this order would be a:

$17,000 decrease

$17,000 increase

$19,160 decrease

$19,160 increase

Answer 1

		Selling Price	60.00
		Direct Material	20.00		Special Order	8000
		Direct Labor	10.00		Special Price	51.00	60*85%
		Variable MOH	5.00		Variable Selling Exp	6.00	8*75%
		Fixed MOH	7.00		Machine Cost	12000
		Variable Selling Exp	8.00
		Fixed Selling Exp	2.00
			52.00
	A	Regular Demand	32000
		Special Order	8000
		Total Demand	40000
		Since Total Demand is within 40000 wheels; No Additional Fixed Costs
		Calculation of Minimum Price:
		Direct Material	20.00
		Direct Labor	10.00
		Variable MOH	5.00
		Fixed MOH	0.00	Sunk Cost
		Variable Selling Exp	6.00
		Fixed Selling Exp	0.00	Sunk Cost
		Machine Cost-Additional	1.50	12000/8000
		Total Cost	42.50
		Answer is 42.50
	B	Impact of Special Order:
		Special Price	51.00
		Less: Relevant Cost	42.50
		Net Benefit PU	8.50
		Special Order	8000
		Increase in Income	68000	(8.50*8000)
		Answer is $68000 Increase
	C	Impact of Special Order:	For Normal	From Cut off
		Units	3000	5000
		Special Price	51.00	51.00
		Less: Relevant Cost	42.50	42.50
		Less: Opportunity Loss		17.00
		Net Benefit PU	8.50	-8.50
		Special Order	3000	5000
		Net Impact	25500	-42500
		Total Impact(Decrease in Income)	-17000
		Answer is $17000 Decrease
		**Opportunity Loss
		Regular Demand	37000
		Special Order	3000
		Total Demand	40000
		Since Demand is More than Capacity; Regular Units are required to be comprimsed for it.
		3000 will be taken from Normal Units, and 5000 from Cut off of Regular Units
		Selling Price	60.00
		Less: Variable Costs:
		Direct Material	20.00
		Direct Labor	10.00
		Variable MOH	5.00
		Variable Selling Exp	8.00
		Contribution Margin-Opportunity Cost	17.00