Question

Jupiter Corporation manufactures skateboards. Several weeks ago, the firm received a special-order inquiry from Venus, Inc. Venus desires to market a skateboard similar to one of Jupiter’s and has offered to purchase 11,000 units if the order can be completed in three months. The cost data for Jupiter’s model no. 43 skateboard follow.

Direct material	$	8.20
Direct labor: 0.25 hours at $9.00		2.25
Total manufacturing overhead:
0.5 hours at $20		10.00
Total	$	20.45

Additional data:

• The normal selling price of model no. 43 is $26.50; however, Venus has offered Jupiter only $15.75 because of the large quantity it is willing to purchase.
• Venus requires a modification of the design that will allow a $2.10 reduction in direct-material cost.
• Jupiter’s production supervisor notes that the company will incur $3,700 in additional setup costs and will have to purchase a $2,400 special device to manufacture these units. The device will be discarded once the special order is completed.
• Total manufacturing overhead costs are applied to production at the rate of $20 per machine hour. This figure is based, in part, on budgeted yearly fixed overhead of $750,000 and planned production activity of 60,000 machine hours (5,000 per month).
• Jupiter will allocate $1,800 of existing fixed administrative costs to the order as “... part of the cost of doing business.”

Required:

1. 1-a. Calculate the net profit increase or (decrease) from accepting the special order.
2. 1-b. Assume that present sales will not be affected. Should the order be accepted from a financial point of view (i.e., is it profitable)?

3. Complete this question by entering your answers in the tabs below.

   • Req 1A
   • Req 1B

   Calculate the net profit increase or (decrease) from accepting the special order. (Do not round intermediate calculations.)

   	Increase (decrease) to profit

   Assume that present sales will not be affected. Should the order be accepted from a financial point of view (i.e., is it profitable)?

   	Should the order be accepted from a financial point of view

Answer 1

Solution

Jupiter Corporation

Req 1A:

Determination of net profit increase or (decrease) from accepting the special order:

Profitability of the special order:
Sales price per unit	$15.75
Variable cost per unit:
Direct materials (8.20 -2.10)	$6.10
Direct labor	$2.25
variable manufacturing overhead	$3.75	(0.50 hours x $7.50)
Variable cost per unit	$12.10
Contribution margin per unit	$3.65
Total contribution margin of 11,000 units	$40,150
Less: Fixed costs related to special order -
setup costs	$3,700
special device	$2,400
Total	$6,100
Net Income	$34,050

The acceptance of the special order would result in net profit increase of $34,050.

Notes:

1. The acceptance of special order would cause a reduction of $2.10 in direct material cost, hence direct material cost = $8.20 – $2.10 = $6.10
2. Variable manufacturing overhead per unit –

Total fixed overhead = $750,000

Budgeted machine hours = 60,000

Predetermined overhead rate per machine hour = 750,000/60,000 = $12.50

Total overhead per machine hour = $20

Variable manufacturing overhead per machine hour = $20 - $12.50 = $7.50

1. The company’s allocation of fixed administrative cost of $1,800 per month is not a relevant cost. It is an allocated cost and would be incurred irrespective of accepting or rejecting the special order, hence not a relevant cost.

Req 1B:

Analysis of accepting the order from a financial point of view, assuming the present sales will not be affected:

sales revenue from special order		$173,250	(11,000 x $15.75)
variable costs:
Direct material	$67,100	(11,000 x (8.20 -2.10)
Direct labor	$24,750	(11,000 x 2.25)
total manufacturing overhead	$110,000	(0.5 x $20 x 11,000)
Additional setup cost	$3,700
special device cost	$2,400
Total costs		$207,950
Net Income(Loss)		($34,700)

The acceptance of the order results in a net loss of $34,700 assuming present sales are not affected. Hence, from the financial point of view, the special order should be rejected.