Question

In: Accounting

The Wade Corporation has the capacity to produce 10,000 units per year. Its predicted operations for...

The Wade Corporation has the capacity to produce 10,000 units per year. Its predicted operations for the year are as follows:

Sales (8,000 units @ $25 each) $200,000

Manufacturing costs:

Variable $8 per unit

Fixed $50,000

Marketing and administrative costs:

Variable $1 per unit

Fixed $15,000

The accounting department has prepared the following projected income statement for the coming year for your use in making decisions.

Sales $200,000

Variable costs:

Manufacturing ($8 x 8,000) $64,000

Marketing ($1 x 8,000) 8,000 72000

Contribution margin $128,000

Fixed costs:

Manufacturing $50,000

Marketing 15,000 65,000

Operating profit $63,000

Required:

Should the company accept a special order for 500 units at a selling price of $10? Assuming that there are no variable marketing and administrative costs for this order and that regular sales will not be affected, what is the impact of this decision on company profits?
Suppose there was a one-time setup fee of $2,000 for the preceding order. Should the special order be accepted? Why?
What other factors should be considered and how would they impact your decision to accept the special order?

Expert Solution

a)

In the special order, 500 units are to be supplied at price of $10 per unit.

There will be no variable marketing and administrative costs for this order.

Fixed costs will not be considered while deciding about special order since fixed costs will be incurred whether special order is accepted or not. Hence, fixed costs are immaterial.

Variable manufacturing cost = $8 per unit

Contribution margin per unit in special order = 10 - 8

= $2

Hence, total contribution by special order = 500 x 2

= $1,000

Special order should be accepted since it will increase profits by $1,000

b)

One time setup fee for the special order = $2,000

Loss if special order is accepted = Total contribution by special order - One time setup fee for the special order

= 1,000 - 2,000

= - $1,000

In this case, special order should not be accepted since it will result in a loss of $1,000

c)

While deciding about special order, following factors must be considered:

- Special order price should not be revealed to the existing customers i.e. special order customer should not be a customer in the prevailing sales territory of the company.

- Special order customer should be made clear that this special price is for time only, future sales will not be made at this price.

- Special order should not impact present regular sales.

ekkarill92 answered 10 months ago

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