Special Orders: Sherene Nili manages a company that produces wedding gowns.She p

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Special Orders: Sherene Nili manages a company that produces wedding gowns.She produces both a custom product that is made to order and astandard product that is sold in bridal salons. Her accountantprepared the following forecasted income statement for March, whichis a busy month:
Custom Dresses    Standard Dresses Total Number of dresses   10 20 30 Sales revenue $50,000 $25,000 $75,000 Materials $10,000 $8,000 $18,000 Labor 20,000 9,000 29,000 Machine depreciation 600 300 900 Rent 4,200 2,800 7,000 Heat and light 1,000 600 1,600 Other production costs 2,800 Marketing and administration 7,700 Total costs $67,000 Operating profit $8,000 Ms. Nili already hasorders for the 10 custom dresses re?ected in the March forecastedincome
statement. The depreciation charges are for machines used in therespective product lines. Machines
depreciate at the rate of $1 per hour based on hours used, so theseare variable costs. In March, cut-
ting and sewing machines are expected to operate for 900 hours, ofwhich 600 hours will be used to
make custom dresses. The rent is for the building space, which hasbeen leased for several years at
$7,000 per month. The rent, heat, and light are allocated to theproduct lines based on the amount of
?oor space occupied.
Avaluedcustomer, whoisaweddingconsultant, hasaskedMs. Nili foraspecial favor.
This customer has aclient whowants toget marriedinearlyApril. Ms.Nili’s companyis
workingatcapacityandwouldhavetogiveupsomeotherbusinesstomakethisdress.Shecan’t
renegeoncustomordersalreadyagreedto, but shecanreducethenumber ofstandarddresses
producedinMarchto10. Ms. Niliwouldlosepermanentlytheopportunitytomakeupthelost
productionof standarddressesbecauseshehasnounusedcapacityfortheforeseeablefuture.
Thecustomer iswillingtopay$25,000for thespecial order.Materialsandlabor for theorder
will cost $6,000 and $10,000, respectively. The special order wouldrequire 140 hours of
machinetime. Ms. Nili’s companywouldsave150hours ofmachinetimefromthestandard
dressbusinessgivenup. Rent, heat andlight,andotherproductioncostswouldnot beaffected
bythespecial order.

Required:
Should Ms. Nili take the order? Explain your answer. Special Orders: Sherene Nili manages a company that produces wedding gowns.She produces both a custom product that is made to order and astandard product that is sold in bridal salons. Her accountantprepared the following forecasted income statement for March, whichis a busy month:
Custom Dresses    Standard Dresses Total Number of dresses   10 20 30 Sales revenue $50,000 $25,000 $75,000 Materials $10,000 $8,000 $18,000 Labor 20,000 9,000 29,000 Machine depreciation 600 300 900 Rent 4,200 2,800 7,000 Heat and light 1,000 600 1,600 Other production costs 2,800 Marketing and administration 7,700 Total costs $67,000 Operating profit $8,000 Ms. Nili already hasorders for the 10 custom dresses re?ected in the March forecastedincome
statement. The depreciation charges are for machines used in therespective product lines. Machines
depreciate at the rate of $1 per hour based on hours used, so theseare variable costs. In March, cut-
ting and sewing machines are expected to operate for 900 hours, ofwhich 600 hours will be used to
make custom dresses. The rent is for the building space, which hasbeen leased for several years at
$7,000 per month. The rent, heat, and light are allocated to theproduct lines based on the amount of
?oor space occupied.
Avaluedcustomer, whoisaweddingconsultant, hasaskedMs. Nili foraspecial favor.
This customer has aclient whowants toget marriedinearlyApril. Ms.Nili’s companyis
workingatcapacityandwouldhavetogiveupsomeotherbusinesstomakethisdress.Shecan’t
renegeoncustomordersalreadyagreedto, but shecanreducethenumber ofstandarddresses
producedinMarchto10. Ms. Niliwouldlosepermanentlytheopportunitytomakeupthelost
productionof standarddressesbecauseshehasnounusedcapacityfortheforeseeablefuture.
Thecustomer iswillingtopay$25,000for thespecial order.Materialsandlabor for theorder
will cost $6,000 and $10,000, respectively. The special order wouldrequire 140 hours of
machinetime. Ms. Nili’s companywouldsave150hours ofmachinetimefromthestandard
dressbusinessgivenup. Rent, heat andlight,andotherproductioncostswouldnot beaffected
bythespecial order.

Required:
Should Ms. Nili take the order? Explain your answer. Custom Dresses    Standard Dresses Total Number of dresses   10 20 30 Sales revenue $50,000 $25,000 $75,000 Materials $10,000 $8,000 $18,000 Labor 20,000 9,000 29,000 Machine depreciation 600 300 900 Rent 4,200 2,800 7,000 Heat and light 1,000 600 1,600 Other production costs 2,800 Marketing and administration 7,700 Total costs $67,000 Operating profit $8,000

Explanation / Answer

x.Xortunity Cost

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