Sherene Nili manages a company that produces wedding gowns. She produces both a

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 780 hours, of which 540 hours will be used to make custom dresses. The rent is for the building space, which has been leased for several years at $5,800 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 $22,600 for the special order. Materials and labor for the order will cost $5,400 and $9,400, respectively. The special order would require 110 hours of machine time. Ms. Nili's company would save 120 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.

I tried solving a-1 and everything is correct but with special order revenue, the impact for revenue, machine depreciation for with special order and impact, and then the with special order operating profit and impact.

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 $ 47,000 $ 27,000 $ 74,000 Materials $ 9,400 $ 7,400 $ 16,800 Labor 19,400 8,400 27,800 Machine depreciation 540 240 780 Rent 3,600 2,200 5,800 Heat and light 1,100 700 1,800 Other production costs 2,200 Marketing and administration 7,100 Total costs $ 62,280 Operating profit $ 11,720

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 780 hours, of which 540 hours will be used to make custom dresses. The rent is for the building space, which has been leased for several years at $5,800 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 $22,600 for the special order. Materials and labor for the order will cost $5,400 and $9,400, respectively. The special order would require 110 hours of machine time. Ms. Nili's company would save 120 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.

I tried solving a-1 and everything is correct but with special order revenue, the impact for revenue, machine depreciation for with special order and impact, and then the with special order operating profit and impact.

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?

Required: a-1. Calculate the differential operating profit (loss). (Select option "increase" or "decrease", k Without special order as the base. Select "none" if there is no effect.) Without With Special Order Special Order $74,000 16,800 27,800 780 86,500 $ 18,500 33,000 Impact 12,500 increase 1,700 increase 5,200 increase Revenue Materials Labor Machine depreciation Contribution margin Rent Heat and light Other production costs Marketing and administration Operating profit (loss) 790 34,2105,590 increase 10E decrease $28,620 $ 5,800 1,800 2,200 7,100 5,800 1,800 2,200 7,100 ?????? onone ?????? $11,720 $ 17,310$ 5,590 increase

Explanation / Answer

Answer 1. Statement of Profitability If Special Order is Accepted Custom Dresses Standard Dresses Special order Total Total No. of dresses                  10                  10                    1 Revenue          47,000          13,500          22,600          83,100 Materials            9,400            3,700            5,400          18,500 Labor          19,400            4,200            9,400          33,000 Machine Depreciation                540                120                110                770 Total Variable Costs          29,340            8,020          14,910          52,270 Contribution          17,660            5,480            7,690          30,830 Fixed Costs: Rent            5,800 Heat & Light            1,800 Other Production Costs            2,200 Marketing & Administration            7,100 Total Fixed Costs          16,900 Operating Profits          13,930 Answer a-1 Without Special Order With Special Order Impact Increase Decrease Revenue          74,000          83,100            9,100                   -   Materials          16,800          18,500            1,700 Labor          27,800          33,000            5,200 Machine Depreciation                780                770                  10 Contribution Margin          28,620          30,830            9,110            6,900 Rent            5,800            5,800 Heat & Light            1,800            1,800 Other Production Costs            2,200            2,200 Marketing & Administration            7,100            7,100 Operating Profit (Loss)          11,720          13,930            9,110            6,900 Net Increase (Decrease) in Profit            2,210            2,210 Answer a-2. Yes, Nili should accept the order, as it will increase its profit by $2,210 Answer b. Mimimum Price Ms. Nili Should Accept: Revenue from special Order          22,600 Less: Increase in Profit          (2,210) Minimum Price          20,390 Minimum Transfer Price should be $20,390, so that Ms. Nili will earns same profits with or without special order.

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