Question

Waterloo Co. sells product P-14 at a price of $48 a unit. The per-unit cost data are direct materials $15, direct labour $10, and overhead $12 (75% variable). Waterloo Co. has sufficient capacity to accept a special order for 40,000 units, but at a discount of 10% from the regular price. Selling costs associated with this order would be $3 per unit. There are no selling costs on its regular orders.

a) Should Waterloo Co. should accept the special order? Show your calculations.

b) Assume the same information as part a) except that Waterloo has no excess capacity. Indicate the net income (loss) that Waterloo would realize by accepting the special order.

c) Assume the information in part b) except that the company could rent the special purpose machine that is required for this order for $100,000. This would allow the company to fulfill its regular orders and this special order on a one time basis.

1. Should the company go ahead and rent this machine and accept the special order?

2. What is the highest price the company can afford to pay to rent the machine to be indifferent as to whether to accept the special order or not. d) List two qualitative considerations that management should consider in deciding whether to accept this offer beyond its immediate impact on profits.

d. List two qualitative considerations that management should consider in deciding whether to accept this offer beyond its immediate impact on profits.

Answer 1

Ans: Water Loo Co. Produces P-14

Particulars	Amount($)
Selling Price per unit	48
Less: Variable Cost per unit
Direct Material	(15)
Direct Labor	(10)
Variable Overhead	(9)
Contribution Per unit	14

Special Order for 40,000 units received

Selling Price per unit -$43.2 (48*(1-0.1))

Special Selling Cost - $3

a) Statement of Profit Per Unit

Particulars	Amount($)
Selling Price per unit	43.2
Less: Variable Cost per unit
Direct Material	(15)
Direct Labor	(10)
Variable Overhead	(9)
Special Selling Cost	(3)
Profit Contribution Per unit	6.2

Company Should Accept the Proposal

b) if Company Does not Surplus capacity to produce Special Order

Particulars	Amount($)
Selling Price per unit	43.2
Less: Variable Cost per unit
Direct Material	(15)
Direct Labor	(10)
Variable Overhead	(9)
Special Selling Cost	(3)
Opportunity cost of contribution loss on Domestic sales per unit	(14)
Profit Contribution Per unit	($7.8)

c) Other information same as part b) If company could rent the special purpose machine that is required for this order for $100,000.

1) Contribution per unit in special Order (part a) - $6.2

Contribution on special Order - $6.2*40,000Units

                                               - $248,000

Profit on Special Order = $248,000- $100,000

                                    = $148,000

So Company should Accept the Special Order

2) Highest Price that the company can paid is = Contribution on special Order

                                                                          - $248,000

d)   List two qualitative considerations that management should consider in deciding whether to accept this offer beyond its immediate impact on profits

1) Competition in the Market

2) Quality of the product