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ADM 2341 Lecture Notes - Lecture 18: Decision Rule, Sunk Costs, Opportunity Cost

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School
University of Ottawa
Department
Administration
Course
ADM 2341
Professor
Abdenour Slaouti

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Document Summary

If management makes its decision based on the total cost per unit of ( + ), the order would be rejected, because costs () would exceed revenues () by per unit. However, since the units can be produced within existing plant capacity, the special order will not increase xed costs. Let"s identify the relevant data for the decision. First, the variable manufacturing costs will increase by. Second, the expected revenue will increase by ,000 ( * Thus, sunbelt will increase its net income by ,000 by accepting this special order. Points: first, it is assumed that sales of the product in other markets would not be affected by this special order. If other sales will be lost, then sunbelt would have to consider the lost sales in making the decision. Second, if sunbelt was operating at full capacity, it is likely that the special order would be rejected.

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Related Questions

A customer has requested that Gamba Corporation fill a specialorder for 3,000 units of product Q41 for $30 a unit. While theproduct would be modified slightly for the special order, productQ41 normal unit product cost is $21.30: Direct materials $ 5.40Direct labor 6.00 Variable manufacturing overhead 2.50 Fixedmanufacturing overhead 7.40 Unit product cost $21.30 Direct laboris a variable cost. The special order would have no effect on thecompany's total fixed manufacturing overhead costs. The customerwould like modifications made to product Q41 that would increasethe variable costs by $1.00 per unit and that would require aninvestment of $14,000 in special molds that would have no salvagevalue. This special order would have no effect on the company'sother sales. The company has ample spare capacity for producing thespecial order. If the special order is accepted, the company'soverall net operating income would increase (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 with the Lost Mine Company logo would be distributed to participants at an upcoming convention sponsored by Lost Mine.

Lost Mine has offered to buy 3,500 of the US umbrellas at a price of $36 each. Mohave currently has the excess capacity necessary to accept the offer. The following information is related to the production of the US umbrella:

Direct materials $ 15.00
Direct labor 8.00
Variable manufacturing overhead 11.00
Fixed manufacturing overhead 2.50
Total cost $ 36.50
Regular sales price $ 44.00

Required:
1. Compute the incremental profit (or loss) from accepting the special order.


3. Suppose that the special order had been to purchase 4,000 umbrellas for $33.00 each. Recompute the incremental profit (or loss) from accepting the special order under this scenario.



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.

The Melville Company produces a single product called a Pong.Melville has the capacity to produce 60,000 Pongs each year. IfMelville produces at capacity, the per unit costs to produce andsell one Pong are as follows. Use the data for questions 7 to 9.Direct materials- $15 Direct labor- 12 Variable manufacturingoverhead- 8 Fixed manufacturing overhead- 9 Variable sellingexpense- 8 Fixed selling expense- 3 The regular selling price forone Pong is $80. A special order has been received by Melville fromMowen Company to purchase 6,000 Pongs next year. If this specialorder is accepted, the variable selling expense will be reduced by75%. However, Melville will have to purchase a specialized machineto engrave the Mowen name on each Pong in the special order. Thismachine will cost $9,000 and it will have no use after the specialorder is filled. The total fixed manufacturing overhead and sellingexpenses would be unaffected by this special order.

Assume Melville can sell 58,000 units of Pong to regularcustomers next year and sell 6000 units to this special ordercustomer will result in losing the contribution on sales to regularcustomers at the regular price due to the 60,000 unit maximumproduction capacity. If Mowen Company offers to buy the specialorder units at $65 per unit, the effect of accepting the specialorder on Melville's operating income next year should be a:

A 36000 increase

B 11000 increase

C 192000 increase

D 47000 increase