Halfway There produces semiconductor chips used in cell phones, tablets and comp

ID: 2729951 • Letter: H

Question

Halfway There produces semiconductor chips used in cell phones, tablets and computers. The firm produces 10 million chips a year and sells each chip for $50. They incur variable costs, per chip, of $12 in direct materials, $20 in direct labor, and $10 in variable manufacturing overhead. Their fixed costs include fixed manufacturing overhead and SG&A costs totaling $75 million per year. Two special orders come in, but Halfway There can only take one of these orders due to capacity constraints. Special Order #1: An order for 2 million chips from a technology startup. They will pay $43 per chip. These chips will cost the same variable costs as listed above and do not alter the fixed costs of the firm. Special Order #2: An order for 1 million chips from a telecommunications firm. They will pay $48 per chip. These chips are specialized and cannot be completed without modifications to the production line. These modifications will cost a total of $8 million (includes costs to reverse modifications once the special order is complete). However, direct materials cost for this special order are lower than usual, only $6 per chip. How much more (or less) in profit does Halfway There if they take Special Order #1 rather than Special Order #2? ***Answer in millions, rounded to millions (e.g. if you get 15,500,000, answer as 16). If Special Order #1 earns less than Special Order #2, answer as a negative number (e.g. -7, -50),***

Explanation / Answer

Calculation of more / (less) in profit if special order #1 is taken rather than special order #2:

Particulars

Special order #1

Special order #2

Sales

$86 million (2million *43)

$48 million (1million * 48)

Less: Variable Costs

$84 million((12+20+10) * 2 million)

$36 million ((6+20+10) * 1 million)

Less: Modification Cost

$8 million

Profit

$2 million

$4 million

Special order #1 earns less than Special Order #2.

Profit earned if special order #1 is taken rather than special order #2

= $2 million - $4 million

= -$2 million