Exercise 23-4 Special Order Decision Antiquities, Inc., produces antique-looking books. Management has just received a request for a special order for 2,000 books and must decide whether to accept it. Venus Company, the purchaser, is offering to pay $22.00 per book, which includes $3.00 per book for shipping costs. The variable production costs per book include $9.20 for direct materials, $4.00 for direct labor, and $3.80 for variable overhead. The current year’s production is 22,000 books, and maximum capacity is 25,000 books. Fixed costs, including overhead, advertising, and selling and administrative costs, total $80,000. The usual selling price is $25.00 per book. Shipping costs, which are additional, average $3.00 per book. Compute the contribution margin per book for the special order. $ per book Should Antiquities accept the special order?
Answer:
This problem is about whether the Antiquities should accept the order or not.
The Company is having an ideal capacity of 25000 books ,
variable costs for the Company are as following:
| Prasent | New | Increase/ Decrese |
|
| 22000 | 2000 | 24000 | |
| Seales | 550000 | 44000 | 594000 |
| Less: variable cost | |||
| direct materials | 202400 | 18400 | 220800 |
| direct labor | 88000 | 8000 | 96000 |
| variable overhead. | 83600 | 7600 | 91200 |
| shipping costs | 66000 | 6000 | 72000 |
| Contribution Margin | 110000 | 4000 | 114000 |
| Less: Fixed Cost | |||
| Fixed costs | 80,000 | 0 | 80,000 |
| Net Income | 30,000 | 4,000 | 34,000 |
As contribution margin and net income increases so company should accept special order
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| Differential Analysis | |||
| Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2) | |||
| Particular | Make Carrying Case (Alt. 1) |
Buy Carrying Case (Alt. 2) | Differential Effect on Income (Alternative 2) |
| Costs | |||
| Purchase price | 0 | -65 | -65 |
| Direct materials per unit | -30 | 30 | |
| Direct labor per unit | -25 | 25 | |
| Variable factory overhead per unit | -3.75 | 3.75 | |
| Fixed factory overhead per unit | -6.25 | -3.75 | 2.5 |
| Income (Loss) | -65 | -68.75 | -3.75 |
| 25*15% = 3.75 |
3.75 |
| 25 * (40%-15%)=6.25 | 6.25 |
Comment: Company should make a product instead of buying outside
