Fairmount Travel Gear produces backpacks and sells them to vendors who sell them
ID: 2531520 • Letter: F
Question
Fairmount Travel Gear produces backpacks and sells them to vendors who sell them under their own label. The cost of one of its backpacks follow:
Riverside Discount Mart, a chain of low-price stores, has asked Fairmount to supply it with 24,000 backpacks for a special promotion Riverside is planning. Riverside has offered to pay Fairmount a unit price of $47 per pack. The regular selling price is $65. The special order would require some modification to the basic model. These modifications would add $4.50 per unit in material cost, $2.00 per unit in labor cost, and $1.00 in variable overhead cost. Although Fairmount has the capacity to produce the 24,000 units without affecting its regular production of 455,000 units, a one-time rental of special testing equipment to meet Riverside’s requirements would be needed. The equipment rental would be $87,000 and would allow Fairmount to test up to 55,000 units.
a. Prepare a schedule to show the impact of filling the Riverside order on Fairmont’s profits for the year. (Enter your answers in thousands rounded to 1 decimal place. (i.e., 5,400,400 should be entered as 5,400.4). Select option "higher" or "lower", keeping Status Quo as the base. Select "none" if there is no effect.)
Status Quo
455,000 units
Alternative
479,000 units
b. Do you agree with the decision to accept the special order?
c. Considering only profit, determine the minimum quantity of backpacks in the special order that would make it profitable. (Do not round intermediate calculations.)
Materials $18.50 Labor 12.50 Variable Overhead 5.50 Fixed overhead ($2,957,500 per year; 455,000 units per year) 6.50 Total $43.00Explanation / Answer
A.
B. No as operating profit has decreased due to acceptance of offer.
C. Minimum quantity that will make special offer profitable is
Fixed Cost of special order/ contribution per unit of special order
=87000/$3= 29000 backpacks from special order
Do give your feedback!! Happy Learning :)
Status Quo 455000 units 24000 Riverside offer Total 479000 units (alternative) Difference Sales 29575 1128 30703 higher Less: variable cost material 8417.5 552 8969.5 higher Labour 5687.5 348 6035.5 higher Variable overhead 2502.5 156 2658.5 higher Total variable cost 16607.5 1056 17663.5 higher Contribution 12967.5 72 13039.5 higher Fixed cost 2957.5 87 3044.5 higher Operating profit/(loss) 10010 (15) 9995 lowerRelated Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.