8. Analyzing a Special-Order Decision Sunblocker Corp. makes several varicties o

Question

8. Analyzing a Special-Order Decision Sunblocker Corp. makes several varicties of bcach umbrcllas and accessories. It has been approached about producing a special order for custom umbrellas. The special-order umbrellas with logo of Randolph Industries would be distributed to participants at an upcoming convention sponsored by Randolph. Randolph has offered to buy 1,500 of the No-More-Squint (NMS) model umbrellas at a price of S8 each. Sunblocker currently has the excess capacity necessary to accept the offer. The following information is related to Direct materials Direct labor Variable manufacturing Fixed manufacturine overhcad Total cost S 2.25 0.75 3.50 9.00 190 Regular sales price Required: 1. Determine the impact this special order would have on Sunblockets total profit. 2. Should Sunblocker accept the special order? 3. Suppose that the special offer had been to purchase 2,000 umbrellas foe $7.50 each. What effect would that offer have on Sunbloskss toal profit?

Explanation / Answer

1)

Fixed costs are sunk costs which are not relevant for decision making as they have already been incurred by the organization. Only variable costs are relevant for decision making

If an organization has excess capacity, it is not loosing income due to special order and so there is no opportunity cost of losing the current customers and income

Relevant cost per unit = Variable cost per unit

= Direct materials + Direct labor + Variable manufacturing overhead

= $2.25 + $0.75 + $3.50

= $6.50

So, profit per unit

= Selling price per unit – relevant cost

= $8 - $6.50

= $1.5 per unit

Since there is profit of $1.5 per unit, the order should be accepted

Impact on total profits

= Profit per unit x Quantity

= $1.50 x 1,500

= $ 2,250 increase in profits

2)

Since there is profit of $2,250, the order should be accepted

3)

Profit per unit

= Selling price per unit – relevant cost

= $7.50 - $6.50

= $1 per unit

Since there is profit of $1 per unit, the order should be accepted

Impact on total profits

= Profit per unit x Quantity

= $1 x 2,000

= $ 2,000 increase in profits

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