Accept or Reject a Special Order The normal selling price of the electrical comp
ID: 2477327 • Letter: A
Question
Accept or Reject a Special Order
The normal selling price of the electrical component is $2.30 per unit. Its full manufacturing cost is $1.85 ($1.05 variable and $0.80 fixed). Pat argued that paying $2.30 per component would wipe out the operating profit and result in her division showing a loss. Steve was interested in the offer because his division was also operating below capacity (the order would not use all the excess capacity).
Required:
1. Conceptual Connection: Should Steve accept the order at a selling price of $1.85 per unit?
SelectYesNoItem 1
By how much will his division's profits be changed if the order is accepted?
$ SelectIncreaseDecreaseItem 3
By how much will the profits of Pat's division change if Steve agrees to supply the part at full cost?
$ SelectIncreaseDecreaseItem 5
2. Conceptual Connection: Suppose that Steve offers to supply the component at $2. In offering this price, Steve says that it is a firm offer, not subject to negotiation. Should Pat accept this price and produce the special order?
SelectYesNoItem 6
If Pat accepts the price, what is the change in profits for Steve's division?
$ SelectIncreaseDecreaseItem 8
3. Conceptual Connection: Assume that Steve's division is operating at full capacity and that Steve refuses to supply the part for less than the full price. Should Pat still accept the special order? Explain.
SelectYesNoItem 9
There will be an SelectincreasedecreaseItem 10 in profits for Pat's division of $ .
Explanation / Answer
1. yes, Steve should accept the order at a selling price of $1.85 per unit.
His division's profits will be increased by $12,800 (8000 units * 2 per unit requirede * 0.80 Fixed cost per unit)
Operating profit 8,000 units * $3 = $24,000
Less: electrical componens Cost 8000units * 2 * $1.85 per unit cost = $29,600
Decrease in profit = $5,600
As Pat's division was operating below capacity he would save the fixed cost of $3 per unit
So his profit will increase by $18,400 (8000 * 3) - 5600
2. If Steve offers to supply the component at $2 total cost of Electrical Component would be $32,000 (8000 * 2 * $2)
Margin per unit for pat's division = $6 (excluding the cost of electrical component)
Total margin = 8000 * 6 = $42,000
less: cost of Electrical components = $32,000
Profit = $10,000
So, Pat should accept this price and produce the special order.
If Pat Accept the order, Steve's division profit would increase by $15,200
Income = 8000*2*2 = $32,000
Variable Expences = 8000*2*1.05 = $16,800
3. If Steve refuses to supply the part for less than the full price. Pat should still accept the special order.
Total margin per unit = $6
Tota electriacal component cost per unit = 2 component * $2.30 = $4.60
Net margin per unit = $6.00 - $4.60 = $1.40 per unit
Total Increase in profit = 8000 units * 1.40 = $11,200