An hat company manufactures , hats which has a fixed manufacturing overhead budg

Question

An hat company manufactures , hats which has a fixed manufacturing overhead budget for year 20X5 of $1,800,000. The sales of hat are expected to be 500,000 units for the year. All variable manufacturing costs are expected to be $10 per unit. The company has budgeted $5,000,000 for selling and administrative expenses and of which, $2,100,000 of them are variable expenses. The sale price of the hat will be $30 each.

(1) If a designer manufacturer offers to buy 160,000 units of hat for $2 million on a one-time special order. Assume that the company has enough manufacturing capacity for the order and there will be no selling and administrative cost incurred. However, a special commission of 5% of the sales of this special order will apply. Should the company take this special order?

(2) For the special order in (1), if the company only has extra capacity of 110,000 units and the additional 50,000 units need to be subcontracted for $20 each, should the company take this special order?

(3) For the special order in (2), what is the highest subcontract price that the company can accept so that the company will not lose money on this special order?

Explanation / Answer

1. offer selling income 2000000

less - variable exp (10*160000) 1600000

less - commission (200000*5%) 100000

profit 300000

should accept the offer

2)

sales 2000000

exp 1600000

comm. 100000

purchase 1000000

loss 700000

company should not accept the order

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