uestion 4 (25 Marks) Part I Squirrels Inc. is a manufacturer of office furniture
ID: 2535302 • Letter: U
Question
uestion 4 (25 Marks) Part I Squirrels Inc. is a manufacturer of office furniture. Currently, the company only has one product which is office table. The company has annual sales of 300 tables with an average selling price of $41,000 per table. It has the capacity to produce 500 tables if market demand increases. The purchase price of raw material is $23,000 for each table. Each table also needs 150 direct labor hours with a rate of $50 per hour. Manufacturing overhead is allocated based on direct labor hours with a standard rate of S120 per hour. The amount of fixed manufacturing overhead is $3,000,000 per year. Variable selling and administration expense is $500 per table and fixed selling and administration expense is $520,000 per year. Required 1) Suppose there is a special order of 200 tables from a customer with offer price $40,000 per table. Production of the special order does not change fixed expenses and variable selling and administration expenses for the special order will be reduced by 60%. Would you recommend the firm to accept or reject the special order? (5 Mark) Refer to the information in 1). Suppose the customer of the special order requires its logo to be printed on the table. As a result, the company has to purchase a logo-printing machine. The cost of the machine is $400,000. Would you recommend the firm to accept or reject the special order? (3 Mark) Refer to the information in 1). Suppose the firm only has the capacity to produce 400 units of new product. Accepting the special order means that the firm need to give up 100 units' normal sales. Would you recommend the firm to accept or reject the special order? (7 Mark) 2) 3)Explanation / Answer
Solution 1:
Variable Manufacturing Overhead per unit = (Total Manufacturing Overhead - Fixed Manufacturing Overhead) / units
=[(300*150*120) - $3,000,000 ] / 300 = $8000 per unit
Hence Special order should be accepted since there is additional income of $260,000.
Solution 2:
Additional income from accepting order = $260,000
Additional Cost of logo printing machine = $400,000
Net Loss of accepting order = $260000-$400000 = - $140,000, Threfore Special order should not be accepted.
Solution 3:
$60,000.00
Since there is additional Income of $60,000 on accepting the special order, therefore it should be accepting even if firm need to give up 100 units normal sales.
Analysis of accepting and rejecting the Special Order Particulars Accept Sepcial Order Additional Sales $80,00,000.00 Additional Variable Cost: Direct Material $46,00,000.00 Direct labor $15,00,000.00 Variable Overhead $16,00,000.00 Variable selling and administrative expense $40,000.00 Additional Income (Loss) $2,60,000.00Related Questions
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