Problem 5 (10 Points) Lorraine manufactures a single product with the following
ID: 2525319 • Letter: P
Question
Problem 5 (10 Points)
Lorraine manufactures a single product with the following full unit costs for 3,000 units:
Direct materials
$80
Direct labor
40
Manufacturing overhead (40% variable)
120
Selling expenses (60% variable)
40
Administrative expenses (10% variable)
20
Total per unit
$300
A company recently approached Lorraine with a special order to purchase 500 units for $300. Lorraine currently sells the models to dealers for $550. Capacity is sufficient to produce the extra 1,000 units. No selling expenses would be incurred on the special order.
Required:
a. Ignoring the special order, determine Lorraine’s profit on production and sales of 3,200 units. Ignore taxes in these analyses.
b. Should Lorraine accept the special order if its goal is to maximize short-run profits? Determine the impact on profit of accepting the order.
c. Determine the minimum price Lorraine would want, to increase before tax profits by $80,000 on the special order.
d. When making a special order decision, what non-quantitative (qualitative) aspects of the decision should Lorraine consider?
Enter your answer in the following space.
Direct materials
$80
Direct labor
40
Manufacturing overhead (40% variable)
120
Selling expenses (60% variable)
40
Administrative expenses (10% variable)
20
Total per unit
$300
Explanation / Answer
a.
Computation of Variable and Fixed Cost per Unit
Particulars
Total
Variable
Fixed
Direct materials
$ 80.00
$ 80.00
$ -
Direct labor
$ 40.00
$ 40.00
$ -
Manufacturing overhead (40% variable)
$ 120.00
$ 48.00
$ 72.00
Selling expenses (60% variable)
$ 40.00
$ 24.00
$ 16.00
Administrative expenses (10% variable)
$ 20.00
$ 2.00
$ 18.00
Total per unit
$ 300.00
$ 194.00
$ 106.00
Computation of Fixed Cost
Unit Sold
3,000
for 3,000 units
Manufacturing Overhead
$ 72.00
$ 216,000
Selling Expenses
$ 16.00
$ 48,000
Administrative Expenses
$ 18.00
$ 54,000
Total Fixed Cost per Unit
$ 106.00
$ 318,000
Total Fixed Cost
$ 318,000.00
Particulars
Normal Order
Sales units
3,200
Selling Price
550
Less: Variable Cost
Direct materials
$ 80.00
Direct labor
$ 40.00
Manufacturing Overhead
$ 48.00
Selling Expenses
$ 24.00
Administrative Expenses
$ 2.00
Total variable Cost
$ 194.00
Contribution per Unit
$ 356.00
Total Contribution
$ 1,139,200.00
Less: Fixed Cost
Manufacturing Overhead
$ 216,000
Selling Expenses
$ 48,000
Administrative Expenses
$ 54,000
Total Fixed Cost
$ 318,000
Profit
$ 821,200.00
b.
Particulars
Special order
Sales units
500
Selling Price
$ 300.00
Less: Variable Cost
Direct materials
$ 80.00
Direct labor
$ 40.00
Manufacturing Overhead
$ 48.00
Selling Expenses
Administrative Expenses
$ 2.00
Total variable Cost
$ 170.00
Contribution per Unit
$ 130.00
Total Contribution
$ 65,000.00
c.
let x be selling price
Variable Cost + Profit = Sales
170 x 500 +$80,000 = 500 x
$85,000 +$80,000 =500 x
$165,000= 500 x
X= $165,000/500
X=$330 is the minimum price
d.
When making a special order decision, Lorraine will consider only variable cost.
Computation of Variable and Fixed Cost per Unit
Particulars
Total
Variable
Fixed
Direct materials
$ 80.00
$ 80.00
$ -
Direct labor
$ 40.00
$ 40.00
$ -
Manufacturing overhead (40% variable)
$ 120.00
$ 48.00
$ 72.00
Selling expenses (60% variable)
$ 40.00
$ 24.00
$ 16.00
Administrative expenses (10% variable)
$ 20.00
$ 2.00
$ 18.00
Total per unit
$ 300.00
$ 194.00
$ 106.00
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.