Problem 1B . Summit Paintball Supply manufactures paintballs used by recreationa
ID: 2380575 • Letter: P
Question
Problem 1B.
Summit Paintball Supply manufactures paintballs used by recreational gamers. The cost of producing a box of 2,500 paintballs is as follows:
Direct materials
$ 12.50
Direct labor
6.25
Variable factory overhead
18.75
Fixed factory overhead
25.00
Variable selling, general, and administrative costs
18.75
Fixed selling, general, and administrative costs
4.00
The fixed factory overhead and fixed SG&A cost is allocated based on an assumption that the business will produce 400,000 boxes of paintballs per year. The company has capacity to produce 500,000 boxes without impacting either category of fixed cost.
Required
Management has received a special order request for 100,000 boxes of "private label" paintballs. The order specifies a per box price of $75. How will profitability be impacted if the order is accepted? Should the order be accepted?
Summit Paintball Supply manufactures paintballs used by recreational gamers. The cost of producing a box of 2,500 paintballs is as follows:
Direct materials
$ 12.50
Direct labor
6.25
Variable factory overhead
18.75
Fixed factory overhead
25.00
Variable selling, general, and administrative costs
18.75
Fixed selling, general, and administrative costs
4.00
The fixed factory overhead and fixed SG&A cost is allocated based on an assumption that the business will produce 400,000 boxes of paintballs per year. The company has capacity to produce 500,000 boxes without impacting either category of fixed cost.
Required
Management has received a special order request for 100,000 boxes of "private label" paintballs. The order specifies a per box price of $75. How will profitability be impacted if the order is accepted? Should the order be accepted?
Explanation / Answer
Profit on accepting order = $75 - ($12.5+$6.25+$18.75+$18.75 ) = $75 - $56.25 = $18.75
Total profit = $18.75 x 100000 = 1875000
The profitability increases by $1875000.Hence, the order should be accepted