Question

Alpine Luggage has a capacity to produce 200,000 suitcases per year. The company is currently producing and selling 80,000 units per year at a selling price of $ 160 per case. The cost of producing and selling one case follows. Variable manufacturing costs $ 64 Fixed manufacturing costs 16 Variable selling and administrative costs 32 Fixed selling and administrative costs 8 Total costs $ 120 The company has received a special order for 5,000 suitcases at a price of $ 100 per case. It will not have to pay any sales commission on the special order, so the variable selling and administrative costs would be only $ 20 per suitcase. The special order would have no effect on total fixed costs. The company has rejected the offer based on the following computations. Selling price per case $ 100 Variable manufacturing costs 64 Fixed manufacturing costs 16 Variable selling and administrative costs 20 Fixed selling and administrative costs 8 Net profit (loss) per case $ (8) Required a. What is the impact on profit for the year if Alpine accepts the special order? Show computations. b. Do you agree with the decision to reject the special order? Explain. No,

Answer 1

The impact on profit for the year if Alpine accepts the special order is -$40,000. The decision to reject the special order should be based on factors such as the opportunity cost and potential impact on regular production.

Step-by-step explanation:

To determine the impact on profit for the year if Alpine accepts the special order, we need to calculate the net profit per case for the special order. The selling price per case is $100 and the total costs per case are $108 ($64 + $20 + $8 + $16). Therefore, the net profit per case for the special order is -$8 ($100 - $108).

To calculate the impact on profit, we multiply the net profit per case by the number of units in the special order. In this case, the special order is for 5,000 units, so the impact on profit would be -$8 * 5,000 = -$40,000.

b. Based on the net profit per case of -$8, it seems that accepting the special order would result in a loss for Alpine. However, we need to consider the opportunity cost of producing the special order instead of the regular production. If producing the special order does not affect the regular production, then it may be profitable to accept the order. However, if producing the special order would lead to a decrease in regular production or higher costs, then it would be reasonable to reject the order.