tive direct contribution margin of $25. e. Reallocate the common expenses. Speci

Question

tive direct contribution margin of $25. e. Reallocate the common expenses. Special Hat Sales. Rothouse Corp. can make 10,000 caps per year. Rothouse can sell 9,000 caps per year to NASCAR racing fans for $10 per hat. The cost per hat based on making 10,000 caps is: 9-6. Prime costs $5.00 Overhead costs 3,00 (Overhead is two-thirds fixed at that volume.) Paul Forman offers to buy 1,000 hats with special boxing insignias for $7 per hat. Attaching special insignias will cost Rothouse $200. Question: What should Rothouse do? Explain. q-7. Sales Priorities With Scarce Resources. The Chief Wahoo Coonerative emnloys

Explanation / Answer

Since the offer of 1000 hats is within the capacity of rothouse that is normal operations will not be affected .Also fixed cost will be incurred whether offer is accepted or not so it is irrelevant for making decision about offer.

Fixed overhead cost = 3*2/3= 2

Variable overhead = 3-2 =1

Rothouse should accept the offer as it will result in incremental profit of $ 800

Incremental revenue 1000*7=7000 less: Prime cost [1000*5] -5000 Variable overhead cost [1000*1] -1000 speciL INSIGNIAS -200 Incremental profit/(loss) 800

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