Question

Riel Company manufactures a variety of tool boxes. The firm is currently operating at 80% of its full capacity of 4,500 machine-hours per month. Each unit requires 30 minutes of machine time. Its sales manager has been looking for special orders to make productive use of the excess capacity, JCL. Ltd., a potential customer, has offered to buy 10,000 tool boxes at $7.90 per box, provided that the entire quantity is delivered in two months. The current per-box cost data are as follows:

Direct materials:$2.60
Direct labor (X hour at $6.40/hour): 3.20
Total manufacturing overhead: 2.10
Total unit product cost: 7.90


Both fixed and variable overhead are allocated using direct labour-hours as a base. Variable overhead is $1.60 per direct labour-hour. Without the order, Riel would have enough business to operate at 3,600 direct labour-hours in each of the next two months. The regular selling price of the tool boxes is $10.90. A sales commission of 50 cents per unit is paid to sales representatives on all regular sales.

No additional selling or administrative expenses are anticipated on account of accepting this special order and no commissions will be paid on this special order.
The production manager is concerned about the labour time that 10,000 boxes would require. She cannot schedule overtime because Riel has a policy against It. JCL will not accept fewer than 10,000 tool boxes. Therefore, in order to fill the special order, it would be necessary for Riel Company to divert some of its regular sales to the special order.

Required:

1-a. Prepare contribution margin income statements for the two-month period both with and without the special order. (Leave no cells blank- be certain to enter "0" wherever required.)

Riel COMPANY

Contribution Margin Income Statement-a) Without Special order b) With Special
total sales revenue
less: variable costs
less: fixed costs
1-b. Based on financial considerations, should Riel accept the order?
Accept or not accepted
2. This part of the question is not part of your connect assignment

Answer 1

Here's the contribution margin income statement for the two-month period both with and without the special order:

Without Special Order With Special Order

Sales $80,160 $105,400

Variable Costs

Direct Materials $43,200 $65,000

Direct Labor $57,600 $96,000

Variable Overhead $57,600 $153,600

Total Variable Costs $158,400 $314,600

Contribution Margin $41,760 $90,800

Fixed Manufacturing Overhead $110,880 $110,880

Fixed Selling and Administrative Expenses $46,080 $46,080

Total Fixed Costs $156,960 $156,960

Income from Operations -$15,200 $-66,160

As you can see, the company would experience a loss from operations if it accepts the special order.

This is because the additional variable costs associated with producing the 10,000 tool boxes would outweigh the contribution margin from the order.

Additionally, the company would have to divert some of its regular sales to the special order, which would also contribute to the loss.

Therefore, it is recommended that Riel Company not accept the special order.