4. Assume that Mohave is operating at full capacity. Calculate the special-order

Question

4. Assume that Mohave is operating at full capacity. Calculate the special-order price per unit at which Mohave would be indifferent between accepting or rejecting the special order.

Profit (or Loss) Increase or Decrease by ( )

Mohave Corp. makes several varieties of beach umbrellas and accessories. It has been approached by a company called Lost Mine Industries about producing a special order for a custom umbrella called the Ultimate Shade (US). The special-order umbrellas wh the Lost Mine Company lago would be distributed to participants at an upcoming convention sponsored by Lost Mine. Lost Mine has offered to buy 2,900 of the US umbrellas at a price of $27 each. Mohave currently has the excess capacity necessary to accept the offer. The follawing information is related to the production of the US umbrella: Direct materials Diroct labor Vanable manutacturing overhead Fixed manufacturing overhead 512.00 6.00 8.00 250 Total cost Regular sales price $35 00 Required: 1. Compute the incremental profit (or loss) from accepting the special order rotit (or Loss) Increascs by 2. Should Mohave accept the special order? No Yes 3. Suppose that the special order had been to purchase 3,400 umbrellas for $25.00 each. Recompute the incremental profit (or loss) from accepting the special order under this scenaric by

Explanation / Answer

Answer1

Note : For computing the special order profitability , regular fixed manufacturing overhead is irrelevant cost thus should not be consider.

Total cost per unit for special order = $12 + $6 + $8 = $26

Increase in Profit from accepting special order

= ( Special order price per unit - Total cost per unit for special order) * Units od special order

($27- $26) * 2,900 units = $2,900

Profit (loss ) increases by $2,900

Answer 2

Yes , Mohave should accept the offer

Answer 3

Decrease in Profit = ($25 - $26) * 3,400 = ($3,400)

Profit (loss ) decreases  by $3,400

Answer 4

Note : Contribution on regular sales per unit = Sales - Variable cost = $35 - $26 = $9

If Mohave is operating at full capacity , then for special order it will charge Variable cost + Contribution lost on regular sales ie $26 + $9 = $35 per unit which is nothing but regular selling price per unit.

The special-order price per unit at which the company would be indifferent between accepting or rejecting the special order is $35

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