Andreasen Corporation manufactures thermostats for office buildings. The followi
ID: 2421190 • Letter: A
Question
Andreasen Corporation manufactures thermostats for office buildings. The following is the cost of each unit:
Simpson Company has approached Andreasen with an offer to buy 7,500 thermostats at a price of $30 each. The regular price is $50. Andreasen has the capacity to produce the 7,500 additional units without affecting its current production of 100,000 units. Simpson requires that each unit use their branding, which requires a more expensive label, resulting in an additional $1 per unit material cost. The labor cost of affixing the label will be the same as for the current models. The Simpson order will also require a one-time rental of packaging equipment for $10,000.
A. Prepare a schedule to show the impact of filling the Simpson order on Andreasen's profits for the year.(Enter your answers in thousands of dollars. Round your answers to 1 decimal place.)
Staus Quo
100,000 Units
Alternative
107,500 Units
Difference
+/-
B. Considering only profit, what is the minimum quantity of thermostats in the special order that would make it profitable, assuming capacity is available?
Material $18 Labor 7 Variable overhead 2 Fixed overhead($900,000per year; 100,00 units per year) 9 Total $36Explanation / Answer
REQ A: STATUS QUO ALTERNATIVE DIFFERENCE Sales revenue 5,000,000 5225000 225000 Less: Variable cost Material 1,800,000 1942500 -142500 Labour 700,000 752500 -52500 Variable overheads 200,000 215000 -15000 Total variable cost 2,700,000 2,910,000 -210000 Contribution margin 2,300,000 2,315,000 15000 Less: Fixed cost 900,000 910,000 -10000 Operating profits 1,400,000 1,405,000 5000 Note: Material cost in Alternative is as follows: Current material cost for 100,000 units 1,800,000 Add: Material cost for 7500 units @$19 142500 Material cost for 107,500 units 1,942,500 Fixed cost for Alternative: Fixed cost incurred 900,000 Add: Rent cost fo equipment 10,000 Total fixed cost 910,000 REQ B: Contribution margin per unit earned from additional units: Selling price per unt 30 Less: variable cost Material (18+1) 19 Labour 7 Variable OH 2 Contribution margin per unit earned from additional units: 2 Additional Fixed cost incurred (rental cost of equipment) 10,000 Break eeven quantity for special order: Additional fixed cost/ Contribution margin per unit from special order ($ 10,000 / 2.00 ) = 5,000 units