The Varone Company makes a single product called a Hom. The companyhas the capacity to produce 40,000 Homs per year. Per unit costs toproduce and sell one Hom at that activity level are:
Direct materials $21
Direct labor $11
Variable manufacturing overhead $6
Fixed manufacturing overhead $8
Variable selling expense $10
Fixed selling expense $3
The regular selling price for one Hom is $65. A special order hasbeen received at Varone from the Fairview Company to purchase 8,100Homs next year at 20% off the regular selling price. If thisspecial order were accepted, the variable selling expense would bereduced by 30%. However, Varone would have to purchase aspecialized machine to engrave the Fairview name on each Hom in thespecial order. This machine would cost $12,100 and it would have nouse after the special order was filled. The total fixed costs, bothmanufacturing and selling, are constant within the relevant rangeof 30,000 to 40,000 Homs per year. Assume direct labor is avariable cost.
If Varone can expect to sell 30,000 Homs next year through regularchannels and the special order is accepted at 20% off the regularselling price, the effect on net operating income next year due toaccepting this order would be a:
$21,900 decrease
$81,000 increase
$52,100 increase
$44,600 increase
Direct materials $21
Direct labor $11
Variable manufacturing overhead $6
Fixed manufacturing overhead $8
Variable selling expense $10
Fixed selling expense $3
The regular selling price for one Hom is $65. A special order hasbeen received at Varone from the Fairview Company to purchase 8,100Homs next year at 20% off the regular selling price. If thisspecial order were accepted, the variable selling expense would bereduced by 30%. However, Varone would have to purchase aspecialized machine to engrave the Fairview name on each Hom in thespecial order. This machine would cost $12,100 and it would have nouse after the special order was filled. The total fixed costs, bothmanufacturing and selling, are constant within the relevant rangeof 30,000 to 40,000 Homs per year. Assume direct labor is avariable cost.
If Varone can expect to sell 30,000 Homs next year through regularchannels and the special order is accepted at 20% off the regularselling price, the effect on net operating income next year due toaccepting this order would be a:
$21,900 decrease
$81,000 increase
$52,100 increase
$44,600 increase
Related questions
The Melrose Corporation produces a single product, Product C.Melrose has the capacity to produce 70,000 units of Product C eachyear. If Melrose produces at capacity, the per unit costs toproduce and sell one unit of Product C are as follows:
| Direct materials | $20 |
| Direct labor | $17 |
| Variable manufacturingoverhead | $13 |
| Fixed manufacturingoverhead | $14 |
| Variable selling expense | $12 |
| Fixed selling expense | $8 |
The regular selling price of one unit of Product C is $100. Aspecial order has been received by Melrose from Moore Corporationto purchase 7,000 units of Product C during the upcoming year. Ifthis special order is accepted, the variable selling expense willbe reduced by 75%. Total fixed manufacturing overhead and fixedselling expenses would be unaffected except that Melrose will needto purchase a specialized machine to engrave the Moore name on eachunit of product C in the special order. The machine will cost$10,500 and will have no use after the special order is filled.Assume that direct labor is a variable cost.
Assume Melrose expects to sell 60,000 units of Product C to regularcustomers next year. If Moore company offers to buy the 7,000special units at $90 per unit, the effect of accepting the specialorder on Melrose's net operating income for next year will be:
$42,000 increase
$54,000 decrease
$105,000 increase
$248,500 increase
Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 48,000 Rets per year. Costs associated with this level of production and sales are given below:
| Unit | Total | ||||
| Direct materials | $ | 20 | $ | 960,000 | |
| Direct labor | 6 | 288,000 | |||
| Variable manufacturing overhead | 3 | 144,000 | |||
| Fixed manufacturing overhead | 9 | 432,000 | |||
| Variable selling expense | 4 | 192,000 | |||
| Fixed selling expense | 6 | 288,000 | |||
| Total cost | $ | 48 | $ | 2,304,000 | |
The Rets normally sell for $53 each. Fixed manufacturing overhead is constant at $432,000 per year within the range of 40,000 through 48,000 Rets per year.
Required:
A. Assume that due to a recession, Polaski Company expects to sell only 40,000 Rets through regular channels next year. A large retail chain has offered to purchase 8,000 Rets if Polaski is willing to accept a 16% discount off the regular price. There would be no sales commissions on this order; thus, variable selling expenses would be slashed by 75%. However, Polaski Company would have to purchase a special machine to engrave the retail chainâs name on the 8,000 units. This machine would cost $16,000. Polaski Company has no assurance that the retail chain will purchase additional units in the future. Determine the impact on profits next year if this special order is accepted.
B. Refer to the original data. Assume again that Polaski Company expects to sell only 40,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 8,000 Rets. The Army would pay a fixed fee of $1.60 per Ret, and it would reimburse Polaski Company for all costs of production (variable and fixed) associated with the units. Because the army would pick up the Rets with its own trucks, there would be no variable selling expenses associated with this order. If Polaski Company accepts the order, by how much will profits increase or decrease for the year?
C. Assume the same situation as that described in (B) above, except that the company expects to sell 48,000 Rets through regular channels next year. Thus, accepting the U.S. Armyâs order would require giving up regular sales of 8,000 Rets. If the Armyâs order is accepted, by how much will profits increase or decrease from what they would be if the 8,000 Rets were sold through regular channels?
