Rianne Company produces a light fixture with the following unit cost: Direct mat

Question

Rianne Company produces a light fixture with the following unit cost: Direct materials $2 Direct labor 1 Variable overhead 3 Fixed overhead 2 Unit cost $8 The production capacity is 300,000 units per year. Because of a depressed housing market, the company expects to produce only 180,000 fixtures for the coming year. The company also has fixed selling costs totaling $500,000 per year and variable selling costs of $1 per unit sold. The fixtures normally sell for $12 each. At the beginning of the year, a customer from a geographic region outside the area normally served by the company offered to buy 100,000 fixtures for $7 each. The customer also offered to pay all transportation costs. Since there would be no sales commissions involved, this order would not have any variable selling costs. Required: 1. Conceptual Connection: Based on a quantitative (numerical) analysis, should the company accept the order? , ------ the quantitative analysis is-----$ in favor of ------ the special order. Anybody can asiist me? tq

Explanation / Answer

As per 100,000 units @ 12 per unit selling price

Differential Benefit

to Accept

Increase/Decrease

in Operating Income

As per 100,000 units @ 7 per unit selling price

Differential Benefit

to Accept

Increase/Decrease

in Operating Income

As per 12 per unit selling price

Differential Benefit

to Accept

Increase/Decrease

in Operating Income

As per $7 per unit selling price

Differential Benefit

to Accept

Increase/Decrease

in Operating Income

Fixed Overhead and selling costs are irrelevant because this is special order. If the special order rejected, there will be no impact on income. Therefore, the quantitative analysis is $100,000 in favour of accepting the special order.

Accept Special Offer Reject Special Offer

Differential Benefit

to Accept

Sales Revenue 1,200,000 - 1,200,000 Direct Material (200,000) - (200,000) Direct Labour (100,000) - (100,000) Variable Overhead (300,000) - (300,000)

Increase/Decrease

in Operating Income

600,000 - 600,000

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