Question

the company receives a special offer for 34,000 units at $12 per unit. the additional sales would not affect its normal sales. variable costs per unit would be the same for the special offer as they are for the normal units. the special offer would require incremental fixed overhead of $136,000 and incremental fixed general and administrative costs of $146,000.

Answer 1

To answer the student's question, we calculate the profits of Doggies Paradise Inc. by analyzing total revenue, marginal revenue, total cost, and marginal cost for producing up to five units, and then we determine the profit maximizing quantity by identifying where marginal revenue equals marginal cost.

Step-by-step explanation:

The student's question pertains to a perfectly competitive firm, Doggies Paradise Inc., which requires a breakdown of revenue and costs associated with different production levels of dog coats. To determine the profit maximizing quantity, we need to calculate total revenue, marginal revenue, total cost, and marginal cost for each unit level, and then create diagrams to visualize the relationships between them.

The fixed cost remains constant at $100, while the variable costs increase with each additional unit. The sale price per dog coat is $72. The total cost for each unit is the sum of fixed costs and variable costs. Marginal cost is the extra cost of producing one more unit, and marginal revenue is the additional revenue from selling one more unit (in a perfectly competitive market, it's equal to the sale price).

Total revenue is calculated by multiplying the sale price by the number of units sold. To find the profit maximizing quantity, we look for where marginal revenue equals marginal cost (MR=MC), beyond which, producing additional units would decrease profit.

Answer 2

a) The loss from the special order is $163,000.

b) The company should reject the special order.

Contribution Margin:

The units of the special order = 34,000

The selling unit price for the special order = $12

Variable cost per unit = $8.50 ($2 + $4 + $2.50)

Contribution margin per unit for the special order = $3.50 ($12 - $8.50)

Total contribution margin from the special order = $119,000 ($3.50 x 34,000)

Incremental fixed overhead = $136,000

Incremental fixed general and administrative costs of $146,000

Total incremental fixed costs = $282,000

Loss from the special order = $163,000 ($119,000 - $282,000)

Thus, based on the loss from the special order, the company should not accept the order.

Complete Question:

Farrow Company reports the following annual results.

Contribution Margin Income Statement

Per Unit Annual Total

Sales (420,000 units) $ 15.00 $ 6,300,000

Variable costs

Direct materials 2.00 840,000

Direct labor 4.00 1,680,000

Overhead 2.50 1,050,000

Contribution margin 6.50 2,730,000

Fixed costs

Fixed overhead 2.00 840,000

Fixed general and administrative 1.50 630,000

Income $ 3.00 $ 1,260,000

The company receives a special offer for 34,000 units at $12 per unit. The additional sales would not affect its normal sales. Variable costs per unit would be the same for the special offer as they are for the normal units. The special offer would require incremental fixed overhead of $136,000 and incremental fixed general and administrative costs of $146,000.

(a) Compute the income or loss for the special offer.

(b) Should the company accept or reject the special offer?