ASSESSMENT NUMBER 4 Word Review View HelpTell mewhao de INSE TE PRESENTED BELoW
ID: 2801257 • Letter: A
Question
ASSESSMENT NUMBER 4 Word Review View HelpTell mewhao de INSE TE PRESENTED BELoW Renella Company manufactures professional staplers and has been approached by a new customer with an offer to purchase 20,000 staplers at a price of $10.00 per stapler. Providing the 20,000 staplers to the new customer will have no impact on Renella Company's present sales to its existing customers. Renella production Renellia Company has budgeted sales of staplers next year to lts existing eustomers to be 75,000 staplers. Renella Commpany's regular Sales Price for its staplers is capacity for producing staplers is 100,000 staplers per year and e Muten is as folliews Direct Materials Direct Labor Variable Manufacturing Overhead 1.0 Fixed Manufacturing Overhead 2.10 Total Produetion Cost Per Unit S11 70 $ 4.20 360 Should Rene Company Accept the Spcil Order If Renella Company accepts the special order request, no Pixed Manufacturing Overhead Costs will be incurred since Renella Company has sufficient excess Required 1. What are the alternatives for Renella Company in regards to the Special Order request? 2. Should Renela Company accept the special order and if accepted by how much will the Net Income (Operating Income) of Renella Commpany increase or decrease? 3. Briefly explain the importance of the statement that "Providing the 20,000 staplers to th·new customer will have no impact Reuella Company's present sales to its existing customers
Explanation / Answer
1. The alternatives before Renella Company is either to accept the special order or to reject it.
2.
Yes, Renella Company should accept the special order. Net Operating Income will increase by $ 8,000.
3. As the company has excess capacity, taking on the special order would not entail opportunity costs of lost sales of regular orders, and the consequential lost contribution margin.
If the company did not have idle capacity, taking on the special order would involve giving up regular orders. In such a situation, the contribution margin lost per unit of regular order given up would be an opportunity cost relevant to the decision to accept the special order. In that case the special order can be accepted as long as the increase in operating income from the special order exceeds the total lost contribution margin.
Direct Materials $ 4.20 Direct Labor 3.60 Variable Manufacturing Overhead 1.80 Relevant Manufacturing Costs $ 9.60 Special Order Sales Price per Unit $ 10.00 Relevant Manufacturing Costs 9.60 Gross Profit per Unit $ 0.40 Number of Units 20,000 Increase in Gross Profit $ 8,000