2. Fairmount Travel Gear produces backpacks and sells them to vendors who sell t

Question

2.

Fairmount Travel Gear produces backpacks and sells them to vendors who sell them under their own label. The cost of one of its backpacks follows: Materials Labor Variable overhead Fixed overhead ($2,853,900 per year; 453,000 units per year) Total $18.30 12.30 5.30 6.30 $42.20 Riverside Discount Mart, a chain of low-price stores, has asked Fairmount to supply it with 22,000 backpacks for a special promotion Riverside is planning. Riverside has offered to pay Fairmount a unit price of $45 per pack. The regular selling price is $63. The special order would require some modification to the basic model. These modifications would add $4.30 per unit in material cost, $1.80 per unit in labor cost, and $0.80 in variable overhead cost. Although Fairmount has the capacity to produce the 22,000 units without affecting its regular production of 453,000 units, a one-time rental of special testing equipment to meet Riverside's requirements would be needed. The equipment rental would be $70,400 and would allow Fairmount to test up to 53,000 units. Required: 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. (.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.) (All Costs in Thousands of Dollars) Status Quo Alternative 453,000 Units 475,000 Units Difference Sales revenue Less variable costs: Materials Labor Variable overhead Total variable cost Contribution margin Less: Fixed costs Operating profit(loss)

Explanation / Answer

Solution a:

Solution b:

As accepting special order will decrease net operating income by $22,000, therefore we are not agree with the decision to accept the special order.

Solution c:

Contribution per unit of special order = Selling price - normal variable cost per unit - additional variable cost per unit

= $45 - ($18.30 + $12.30 + $5.30) - ($4.30 + $1.80 + $0.80) = $2.20 per unit

Special equipment rental = $70400

Minimum quantity of backpacks in the special order to be sold that would make it profitable = $70,400 / $2.20 = 32000 units.

Differential Analysis - Fairmount Travel Gear Particulars Status Quo (453000 Units)
(Alt 1) Regular Sales + Special order (475000 units)(Alt 2) Differential effect on income (Alt 2) Details Amount Details Amount Revenue 453000*$63 $28,539,000.00 (453000*$63)+(22000*$45) $29,529,000.00 $990,000.00 Costs: Direct Material 453000*$18.30 $8,289,900.00 (475000*$18.30)+(22000*$4.30) $8,787,100.00 $497,200.00 Direct Labor 453000*$12.30 $5,571,900.00 (475000*$12.30)+(22000*$1.80) $5,882,100.00 $310,200.00 Variable Overhead 453000*$5.30 $2,400,900.00 (475000*$5.30)+(22000*$0.80) $2,535,100.00 $134,200.00 Fixed overhead $2,853,900.00 $2,924,300.00 $70,400.00 Income / (Loss) $9,422,400.00 $9,400,400.00 -$22,000.00

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