Mix Up, Inc. Activity Mix Up, Inc. manufactures three different blender models.
ID: 2539495 • Letter: M
Question
Mix Up, Inc. Activity Mix Up, Inc. manufactures three different blender models. Unit information for its products follow Basic Deluxe Pro Sales Price Direct Materials Direct Labor Variable MOH Fixed MOH Variable Selling costs Fixed Administrative Costs Required machine hours Required labor hours Expected Unit Demand S40S100S250 S30 S13 S4 S5 S10 S8 S3 S3 S4 S6 S50 S48 S6 S10 S25 S45 S25 0.5 0.8 50,000 20,00010,000 Note: Download the excel file to complete any calculations for this work. Case 1- Special Order Mix Up received a special order for 1,000 units of the Deluxe blender at a selling price of S80.00 per unit. Assume capacity exists to satisfy this order. Variable selling costs will be reduced to $3.00 unit. Required 1. What are the relevant costs in this decision? What is the effect on NOI if Mix Up accepts this special order? Assume that Mix Up is operating at full capacity before satisfying the special order. What will be the effect on NOI if Mix Up accepts this special order? Now assume that Mix Up has enough excess capacity to produce 700 units. What will be the effect on NOI if Mix Up accepts this special order (assume the full order is satisfied)? 2. 3. 4. 5. What are some qualitative concerns Mix Up might have in this decision to accept the special order?Explanation / Answer
1) The relevant costs would be the variable expenses associated with the order: The unit variable costs are: Direct materials $ 30.00 Direct labor $ 13.00 Variable MOH $ 4.00 Variable selling costs $ 3.00 Variable expenses per unit $ 50.00 2) If the special order is accepted, the NOI will increase by the total contribution margin generated by the order which is equal to 1000*(80-50) = $ 30,000 This is because there is spare capacity and hence no increase in fixed costs. 3) If Mix up is operating at full capacity, then the effect would be a DECREASE in NOI to the extent of $13,000 as below: Contribution margin gained on the special order $ 30,000 Less: Contribution margin lost on the existing market = (100-30-13-4-10)*1000 = $ 43,000 Decrease in NOI $ -13,000 4) In this situation the NOI will increase by $17,100 as worked out below: Contribution margin gained on the special order $ 30,000 Less: Contribution margin lost on the existing market = (100-30-13-4-10)*300 = $ 12,900 Increase in NOI $ 17,100 5) The quality considerations would be: *Whether it would affect the existing market for deluxe, which depends on whether the person buying the special order would resale it in the same market.