Problem 2 (Textbook Referenee: P6-3) - Decide whether to accept or reject a spec

Question

Problem 2 (Textbook Referenee: P6-3) - Decide whether to accept or reject a special order Ocean View Company operates tour boats. Its predicted operations for the year are as follows: 400,000 Sales (1,000 tours per year) Costs: Variable Fixed $250 per tour $100,000 per year The company has received a request to offer 100 tours for $300 each. Ocean View has plenty of capacity to do these tours in addition to its regular business. Doing these tours would not affect the company's regular sales or its fixed costs. Required: a. Should the company do the special tours for $300 per tour? ACCEPT or REJECT? (circle your answer) Sales revenue Less: Variable costs Contribution margin b. What is the effect of the decision on the company's operating profit?

Explanation / Answer

a) if company drope product C, company will lose a net income of $70,000. so dont eliminate.

B. Overall net income will d

Ranger Company Relevant revenues and Costs of alternatives Keep product C Eliminate product C Differential Revenues $                                       1,100,000 $1,100,000-$200,000 = $900,000 $                                           (200,000) Expenses (All variable) $600,000+$90,000 = $690,000 $690,000 - $100,000 - $30,000 = $560,000 $690,000-$560,000 = $130,000 Net advantage (Disadvantage) of dropping product C $130,000-$200,000 = ($70,000)

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