Sherene Nili manages a company that produces wedding gowns. She produces both a
ID: 2343752 • Letter: S
Question
Sherene Nili manages a company that produces wedding gowns. She produces both a custom prod- uct that is made to order and a standard product that is sold in bridal salons. Her accountant pre- pared the following forecasted income statement for March, which is a busy month:
Ms. Nili already has orders for the 10 custom dresses reflected in the March forecasted in- come statement. The depreciation charges are for machines used in the respective product lines. Machines depreciate at the rate of $1 per hour based on hours used, so these are variable costs. In March, cutting and sewing machines are expected to operate for 900 hours, of which 600 hours will be used to make custom dresses. The rent is for the building space, which has been leased for several years at $7,000 per month. The rent, heat, and light are allocated to the product lines based on the amount of floor space occupied.
A valued customer, who is a wedding consultant, has asked Ms. Nili for a special favor. This customer has a client who wants to get married in early April. Ms. Nilis company is working at capacity and would have to give up some other business to make this dress. She cant renege on custom orders already agreed to, but she can reduce the number of standard dresses produced in March to 10. Ms. Nili would lose permanently the opportunity to make up the lost production of standard dresses because she has no unused capacity for the foreseeable future. The customer is willing to pay $25,000 for the special order. Materials and labor for the order will cost $6,000 and $10,000, respectively. The special order would require 140 hours of machine time. Ms. Nilis com- pany would save 150 hours of machine time from the standard dress business given up. Rent, heat and light, and other production costs would not be affected by the special order.
Required
A)Should Ms. Nili take the order? Explain your answer.
B)What is the minimum price Ms. Nili should accept to take the special order?
C)What are the other factors, if any, besides price that she should consider?
Sherene Nili manages a company that produces wedding gowns. She produces both a custom prod- uct that is made to order and a standard product that is sold in bridal salons. Her accountant pre- pared the following forecasted income statement for March, which is a busy month: Ms. Nili already has orders for the 10 custom dresses reflected in the March forecasted in- come statement. The depreciation charges are for machines used in the respective product lines. Machines depreciate at the rate of $1 per hour based on hours used, so these are variable costs. In March, cutting and sewing machines are expected to operate for 900 hours, of which 600 hours will be used to make custom dresses. The rent is for the building space, which has been leased for several years at $7,000 per month. The rent, heat, and light are allocated to the product lines based on the amount of floor space occupied. A valued customer, who is a wedding consultant, has asked Ms. Nili for a special favor. This customer has a client who wants to get married in early April. Ms. Nili½s company is working at capacity and would have to give up some other business to make this dress. She can½t renege on custom orders already agreed to, but she can reduce the number of standard dresses produced in March to 10. Ms. Nili would lose permanently the opportunity to make up the lost production of standard dresses because she has no unused capacity for the foreseeable future. The customer is willing to pay $25,000 for the special order. Materials and labor for the order will cost $6,000 and $10,000, respectively. The special order would require 140 hours of machine time. Ms. Nili½s com- pany would save 150 hours of machine time from the standard dress business given up. Rent, heat and light, and other production costs would not be affected by the special order. Required A)Should Ms. Nili take the order? Explain your answer. B)What is the minimum price Ms. Nili should accept to take the special order? C)What are the other factors, if any, besides price that she should consider?Explanation / Answer
Profitability Statement
=====================
Custom Standard Special Total
No. of Dresses 10 10
Sales 50,000 12,500 25,000 87,500
Less :Total VC
Materials 10,000 4,000 6,000 20,000
Labor 20,000 4,500 10,000 34,500
Machine Dep. 600 150 140 890
Rent 4,200 1,400 1,400 7,000
Heat & Light 1,000 300 300 1,600
Total Var. Cost 35,800 10,350 17,840 63,990
Contribution 14,200 2,150 7,160 23,510
Other Prod. cost (2,800)
Marktg. & Admin. (7,700)
Operating Profit 13,010
A)Should Ms. Nili take the order? Explain your answer.
Yes, Ms. Nili should accept the special order as it would increase existing profit by $5,010 ($13,010 - $8,000)
B)What is the minimum price Ms. Nili should accept to take the special order?
The minimum acceptable price for the special order is the total variable cost $17,840
C)What are the other factors, if any, besides price that she should consider?
If the special order is accepted, the existing order for Standard deresses would be lost. The opportunity cost of losing theses orders should also be considered.
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