Alpine Luggage has a capacity to produce 420,000 suitcases per year. The company

Question

Alpine Luggage has a capacity to produce 420,000 suitcases per year. The company is currently producing and selling 340,000 units per year at a selling price of $399 per case. The cost of producing and selling one case follows:

The company has received a special order for 20,000 suitcases at a price of $249 per case. It will not have to pay any sales commission on the special order, so the variable selling and administrative costs would be only $51 per suitcase. The special order would have no effect on total fixed costs. The company has rejected the offer based on the following computations:

Variable manufacturing costs $ 157 Fixed manufacturing costs 40 Variable selling and administrative costs 84 Fixed selling and administrative costs 21 Total costs $ 302 Required: a. What is the impact on profit for the year if Alpine accepts the special order? (Enter your answers in thousands of dollars. Select option "higher" or "lower", keeping Status Quo as the base. Select "none" if there is no effect.) (All costs in $000) Status Quo Alternative 340,000 Units 360,000 Units Difference Sales revenue Variable costs Manufacturing Selling and administrative Contribution margin Fixed costs Operating profit b. Do you agree with the decision to reject the special order? No

Explanation / Answer

Selling Price 399.00 Variable Manufacturing Cost 157.00 Fixed Manufacturing Cost 40.00 Variable S&A Cost 84.00 Fixed S&A Cost 21.00 Total 302.00 Status Quo Alternative 340000 Units 360000 Units Difference 340000 Units 360000 Units Sales Revenue 135660000 140640000 4980000 340000*399 (340000*399)+(20000*249) Variable Costs: Manufacturing 53380000 56520000 3140000 340000*157 (340000+20000)*157) S&A 28560000 29580000 1020000 340000*84 (340000*84)+(20000*51) Contribution Margin 53720000 54540000 820000 Fixed Cost 20740000 20740000 0 (21+40)*340000 (21+40)*340000 (Fixed Cost remains same) Operating Profit 32980000 33800000 820000 Accept the Order

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