Sherene Nili manages a company that produces wedding gowns. She produces both a

Question

Sherene Nili manages a company that produces wedding gowns. She produces both a custom product that is made to order and a standard product that is sold in bridal salons. Her accountant prepared the following forecasted income statement for March, which is a busy month:

Ms. Nili already has orders for the 10 custom dresses reflected in the March forecasted income statement. The depreciation charges are for machines used in the respective product lines. Machines depreciate at the rate of $1 per hour based on hours used, so these are variable costs. In March, cutting and sewing machines are expected to operate for 880 hours, of which 590 hours will be used to make custom dresses. The rent is for the building space, which has been leased for several years at $6,800 per month. The rent, heat, and light are allocated to the product lines based on the amount of floor space occupied.

A valued customer, who is a wedding consultant, has asked Ms. Nili for a special favor. This customer has a client who wants to get married in early April. Ms. Nili's company is working at capacity and would have to give up some other business to make this dress. She can't renege on custom orders already agreed to, but she can reduce the number of standard dresses produced in March to 10. Ms. Nili would lose permanently the opportunity to make up the lost production of standard dresses because she has no unused capacity for the foreseeable future. The customer is willing to pay $23,900 for the special order. Materials and labor for the order will cost $5,900 and $9,900, respectively. The special order would require 135 hours of machine time. Ms. Nili's company would save 145 hours of machine time from the standard dress business given up. Rent, heat and light, and other production costs would not be affected by the special order.

Custom Dresses Standard Dresses Total Number of dresses 10 20 30 Sales revenue $ 49,500 $ 29,500 $ 79,000 Materials $ 9,900 $ 7,900 $ 17,800 Labor 19,900 8,900 28,800 Machine depreciation 590 290 880 Rent 4,100 2,700 6,800 Heat and light 1,200 800 2,000 Other production costs 2,700 Marketing and administration 7,600 Total costs $ 66,580 Operating profit $ 12,420 Required a-1. Calculate the differential operating profit (loss). (Select option "increase" or "decrease", keeping Without special order as the base. Select "none" if there is no effect.) Without Special Order With Special Order Impact Revenue Materials Labor Machine depreciation Contribution margin Rent Heat and light Other production costs Marketing and administration Operating profit (loss) a-2. From an operating profit (loss) perspective for March, should Ms. Nili accept the order? Yes 0 b. What is the minimum price Ms. Nili should accept to take the special order? Minimum price

Explanation / Answer

a-1.

Working: With Special Order

a-2. Yes

b. Minimum price: $22140

The minimum price should ensure that the contribution on the special order matches the contribution lost on the standard dresses. Thus, the minimum price should be $5900 + $9900 + $135 + $6205 = $22140.

Without Special Order With Special Order Impact Revenue 79000 88150 Increase 9150 Materials 17800 19750 Increase 1950 Labor 28800 34250 Increase 5450 Machine depreciation 880 870 Decrease 10 Contribution margin 31520 33280 Increase 1760 Rent 6800 6800 None 0 Heat and light 2000 2000 None 0 Other production costs 2700 2700 None 0 Marketing and administration 7600 7600 None 0 Operating profit (loss) 12420 14180 Increase 1760

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