Accept or Reject a Special Order Moore Company manufactures and sells a single p
ID: 2551225 • Letter: A
Question
Accept or Reject a Special Order
Moore Company manufactures and sells a single product called a Lop. Operating at capacity, the company can produce and sell 30,000 Lops per year. Costs associated with this level of production and sales are given below:
Unit Total
Direct materials $15 $450,000
Direct labour 8 240,000
Variable manufacturing overhead 3 90,000
Fixed manufacturing overhead 9 270,000
Variable selling expense 4 120,000
Fixed selling expense 6 180,000
Total cost $45 $1,350,000
The Lops normally sell for $50 each. Fixed manufacturing overhead is constant at $270,000 per year within the range of 25,000 through 30,000 Lops per year.
Required:
Assume that due to a recession, Moore Company expects to sell only 25,000 Lops through regular channels next year. A large retail chain has offered to purchase 5,000 Lops if Moore is willing to accept a 16% discount off the regular price. There would be no sales commissions on this order; so variable selling expenses would be slashed by 75%. However, Moore Company would have to purchase a special machine to engrave the retail chain's name on the 5,000 units. This machine would cost $10,000. Moore Company has no assurance that the retail chain will purchase additional units in the future. Determine the impact on profits next year if this special order is accepted.
Refer to the original data. Assume again that Moore Company expects to sell only 25,000 Lops through regular channels next year. The provincial government would like to make a one-time- only purchase of 5,000 Lops. The government would pay a fixed fee of $1.80 per Lop, and it would reimburse Moore Company for all costs of production (variable and fixed) associated with the units. Since the government would pick up the Lops with its own trucks, there would be no variable selling expenses associated with this order. If Moore Company accepts the order, by how much will profits increase or decrease for the year?
Assume the same situation as that described in (2) above, except that the company expects to sell 30,000 Lops through regular channels next year, so accepting the government's order would require giving up regular sales of 5,000 Lops. If the government's order is accepted, by how much will profits increase or decrease from what they would be if the 5,000 Lops were sold through regular channels?
Explanation / Answer
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Part-1
Part-2
Since Government is reimbursing all production realted cost i.e. material/labor/variable/fixed overhead (not selling), and fixed overhead is irrelevant cost as it already absorbed by 25000 units, we will consider this as revenue.
Part-3
Profit will decrease by 100000-54000=46000.
25000 Regular Channel 5000 to Retial chain Working Per Unit Total Per Unit Total Unit 25000 5000 Selling Price 50 1250000 42 210000 16% discount on seling price to Retail Variable Cost: Direct Material 15 375000 15 75000 Direct Labor 8 200000 8 40000 Variable Overhead 3 75000 3 15000 Variable Selling overhead 4 100000 1 5000 Reduced by 75% Total Variable Cost 30 750000 27 135000 Fixed Cost: Overhead 270000 0 0 Aborbed in 25000 Selling Overhead 180000 0 0 Aborbed in 25000 Total Fixed Cost 450000 0 Special order cost 0 0 10000 Total Cost 1200000 145000 Operating Income 50000 65000