Problem 4-Accept or Reject a Special Order (15 Marks) Morton Company manufacture

Question

Problem 4-Accept or Reject a Special Order (15 Marks) Morton Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 30,000 Rets per year. Costs associated with this level of production and sales are given below: Unit Total Direct materials Direct labor Variable manufacturing overhead Fixed manufacturi $15 $450,000 8 240,000 Variable selling expense Fixedsellingexpense 9 270,000 4 120,000 1-6-1-1801(00- Total cost $270,000 per year within the range of 25,000 through 30,000 Rets per year. Required: Rets normally sell for $50 each. Fixed manufacturing overhead is constant at 1.Assume that due to a recession, Morton Company expects to sell only 25,000 Rets through regular channels next year. A large retail chain has offered to purchase 5,000 Rets if Morton is willing to accept a 16% discount off the regular price. There would be no sales commissions on this order, thus, variable selling expenses would be slashed by 75%. However, Morton Company would have to purchase a special machine to engrave the retail chain's name on the 5,000 units. This machine would cost $10,000. Morton Company has no assurance that the retail chain will purchase additional units in the future. Determine the impact on profits next year if this special order is accepted. (5 marks) 2. Refer to the original data. Assume again that Morton Company expects to sell only 25,000 Rets through regular channels next year. The U.S. Army would like to make one-time-only purchase of 5,000 Rets. The Army would pay a fixed fee of $1.80 per Ret, and it would reimburse Morton Company for all costs of production (variable and fixed) associated with the units. Because the army would pick up the Rets with its own trucks, there would be no variable selling expenses associated with this order. If Morton Company accepts the order, by how much will profits 3. Assume theease for the year? (5 marks) situation as that described in (2) above, expect that the company same order would require giving up regular sales of 5,000 Rets. If the be if the 5,000 Rets were sold through regular channels? to sell 30,000 Rets through regular channels next year. Thus, accepting what thew s accepted, by how much will profits increase or decrease from what they the U.S. Army's Army'sd (S marks)

Explanation / Answer

Req 1: Net financial advantgaaes/Disadvantges of accepting the offer: Incremental sales revenue (5000 units @ $42) 210000 Less: Incremental cost: Material (5000 units @ 15) 75000 Labour (5000 units @ 8) 40000 Variable Mannufacturing OH (5000 units @ 3) 15000 Variable Selling expense (5000 units @ 1.50) 7500 Machine cost 10000 Net Financial advantage 62500 Hence,the offer must be acepted. Req 2: Incremntal revenue from army Order (5000 units @ 36.80) 184000 Less: Incremnetal variable cost 130000 (5000 units @ 26 per unit) Net Financial advantage 54000 Hence, offer must be accpeted. Req 3: Net financial advantage from Army 54000 Less; Loss of contribution from regular customer 100,000 (5000 units @ 20 per unit) Net income decrease -46000 Note: Contribution per unit from regular customer is selling price i.e. $ 50 -Variable cost (15+8+3+4)

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