The Cat Corporation manufactures a variety of doodids for retail sale. The doodi
ID: 2435964 • Letter: T
Question
The Cat Corporation manufactures a variety of doodids for retail sale. The doodids carry one of several Cat name brands, and are normally distributed through wholesalers. Normal, Inc., a large retailer, has approached Cat with an offer to purchase 60,000 units of a customized version of product D38 over the next three months, to be sold under the retailer’s house brand. The retailer offers to pay $190/unit, which is considerably less than Cat 's normal wholesale price of $280. A design modification would reduce the cost of direct materials by $8/unit. To fill the order, Cat would need to purchase a machine for $40,000, which could be sold for $22,000 after three months. The current cost to produce D38 is $216/unit: direct materials $61, direct labor, $35, and overhead $120. Overhead is 25% variable and 75% fixed. Over the next three months, Cat 's budgeted production without the Normal order is 70% of the plant machine capacity of 50,000 units/month. What factors should Cat consider in deciding whether to accept the order from Norma?
Explanation / Answer
Without Special With Special Incremental Order Order Analysis 70 % of 50,000 95,000 Units 35,000 Units Revenue-Regular Sales 9,800,000.00 9,800,000.00 0.00 Revenue-Special Order 11,400,000.00 11,400,000.00 Costs and Expenses : Variable Costs 126 *35,000- Regular Production 4,410,000.00 10,890,000.00 (6,480,000.00) 118 * 60000 + 126 *35,000 (If special order is accepted ) Fixed Expenses 5,400,000.00 5,406,000.00 (6,000.00) Income from sale of 22,000.00 22,000.00 machine Incremental profit or loss 4,936,000.00 Since there is incremental profit, the order should be accepted.