Sherene Nili manages a company that produces wedding gowns. She produces both a
ID: 2390839 • Letter: S
Question
Sherene Nili manages a company that produces wedding gowns. She produces both a custom product that is made to order and a standard product that is sold in bridal salons. Her accountant prepared 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 income 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 1,100 hours, of which 700 hours will be used to make custom dresses. The rent is for the building space, which has been leased for several years at $9,000 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. Nili's company is working at capacity and would have to give up some other business to make this dress. She can't 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 $29,000 for the special order. Materials and labor for the order will cost $7,000 and $11,000, respectively. The special order would require 180 hours of machine time. Ms. Nili's company would save 200 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-1. Calculate the differential operating profit (loss). (Select option "increase" or "decrease", keeping Without special order as the base. Select "none" if there is no effect.)
a-2. From an operating profit (loss) perspective for March, should Ms. Nili accept the order?
b. What is the minimum price Ms. Nili should accept to take the special order?
Custom Dresses Standard Dresses Total Number of dresses 10 20 30 Sales revenue $ 55,000 $ 35,000 $ 90,000 Materials $ 11,000 $ 9,000 $ 20,000 Labor 21,000 10,000 31,000 Machine depreciation 700 400 1,100 Rent 5,200 3,800 9,000 Heat and light 1,100 700 1,800 Other production costs 3,800 Marketing and administration 8,700 Total costs $ 75,400 Operating profit $ 14,600Explanation / Answer
Answer for 1)
Here,it is assumed that no standard dresses are produced from remaining 20 hours(200hours-180hours) and also other production costs and marketing and animation costs remain constant.
84000
($55000+$29000)
17500
($35000×10/20)
18000
($11000+$7000)
4500
($9000×10/20)
32000
($21000+$11000)
5000
($10000×10/20)
880
[(700+180)hours×$1]
200
(200hours×$1)
Total profit=$101500-$83880=$17620
Increase or decrease in profit:$17620-$14600
=$3020 increase in profit.
Answer for 2 a)
Yes.
I think mr.nili must accept the offer as it boosts the profit by $3020.
Answer for 2 b)
Minimum price that ms.nili should accept to take special order:
$29000-$3020*=$25980.
*$3020 is taken as after taking it still ms.nili must be able to get the profit of $14600.
Costing dresses ($) Standard dresses ($) Total Sales revenue84000
($55000+$29000)
17500
($35000×10/20)
101500 Materials18000
($11000+$7000)
4500
($9000×10/20)
22500 Labor32000
($21000+$11000)
5000
($10000×10/20)
37000 Machine depreciation880
[(700+180)hours×$1]
200
(200hours×$1)
1080 Rent 5200 3800 9000 Hear and light 1100 700 1800 Other production costs 3800 Marketing and administration 8700 Total costs 83880Related Questions
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