Question

Carlsbad Enterprises has a capacity to produce 400,000 computer cases per year. The company is currently producing and selling 320,000 cases per year at a selling price of $399 per case. The cost of producing and selling one case follows:

Variable manufacturing costs	$	163
Fixed manufacturing costs		42
Variable selling and administrative costs		80
Fixed selling and administrative costs		21
Total costs	$	306

The company has received a special order for 30,000 cases at a price of $250 per case. Because it does not have to pay a sales commission on the special order, the variable selling and administrative costs would be only $52 per case. The special order would have no effect on total fixed costs. The company has rejected the offer based on the following computations:

Selling price per case	$	250
Variable manufacturing costs		163
Fixed manufacturing costs		42
Variable selling and administrative costs		52
Fixed selling and administrative costs		21
Net loss per case	$	(28	)

Required:

a.	Compute the differential profit/loss if the order is accepted.(Enter your answers in thousands of dollars.)

	status quo 320000 units	alternative 350000 units	difference	higher/lower/none
sales revenue
variable costs:
manufacturing
selling and admin
contribution margin
fixed cost
operating profit

b.	From an operating profit perspective for the current year, do you agree with the decision to reject the special order?
	Yes No

Answer 1

Sales revenue	399	250
Variable manufacturing costs	163	163
	236	87
Fixed manufacturing cost	42	0
	194	87
variable selling & Distribution exp	80	52
	114	35
Fixed selling & Distribution	21	0
Net profit per unit	93	35

	status quo	alternative	Difference
Particulars/Units	320000	350000	30000
Sales revenue	127680000	135180000	7500000
Variable manufacturing costs	52160000	57050000	4890000
	75520000	78130000	2610000
Fixed manufacturing cost	13440000	13440000	0
	62080000	64690000	2610000
variable selling & Distribution exp	25600000	27160000	1560000
	36480000	37530000	1050000
Fixed selling & Distribution	6720000	6720000	0
Net profit	29760000	30810000	1050000

b)Yes, the order should be accepted from an operating profit perspective for the current year.

As fixed cost remains same at any given level of production it should be ignored while evaluating additional unit cost of production.