Question

Harcourt Manufacturing (HM) has the capacity to produce 10,000 fax machines per year. HM currently produces and sells 7,000 units per year. HM currently leases its excess capacity for a rental fee of $12,000. The fax machines normally sell for $100 each. Modem Products has offered to buy 2,000 fax machines from HM for $60 each. Unit-level costs associated with manufacturing the fax machines are $15 each for direct labor and $40 each for direct materials. Product-level and facility-level costs are $50,000 and $65,000, respectively.

Based on this information (ignore qualitative characteristics) :________.
a. HM should reject the offer because accepting it will reduce profitability by $2,000.
b. HM should accept the offer because accepting it will contribute $10,000 to profit.
c. HM should reject the offer because accepting it will reduce profitability by $10,000.
d. HM should accept the offer because accepting it will contribute $12,000 to profit.
A company should accept a special order if: _______.
a. additional revenue is greater than relevant costs.
b. the avoidable cost of making the products is less than the sunk cost.
c. the company is operating at full capacity.
d. qualitative features are unfavorable.

Answer 1

To determine the profitability of accepting the special order from Modem Products, we need to compare the additional revenue from the order with the relevant costs. The additional revenue would be $120,000 and the relevant costs would be $110,000. Therefore, the incremental profit would be $10,000, indicating that HM should accept the offer.

Step-by-step explanation:

To determine the profitability of accepting the special order from Modem Products, we need to compare the additional revenue from the order with the relevant costs. The additional revenue from selling 2,000 fax machines at $60 each would be 2,000 x $60 = $120,000. The relevant costs would include the unit-level costs of direct labor and direct materials, which would be 2,000 x ($15 + $40) = $110,000.

Therefore, the incremental profit from accepting the offer would be $120,000 - $110,000 = $10,000. Since the incremental profit is positive, HM should accept the offer. The correct answer is b. HM should accept the offer because accepting it will contribute $10,000 to profit.

Answer 2

Harcourt Manufacturing (HM)

1. Based on this information (ignore qualitative characteristics) :________.

a. HM should reject the offer because accepting it will reduce profitability by $2,000.

2. A company should accept a special order if: _______.

a. additional revenue is greater than relevant costs.

Step-by-step explanation:

a) Data and Calculations:

Production capacity for fax machines per year = 10,000

Current production units per year = 7,000

Excess capacity = 3,000 (10,000 - 7,000)

Rental fee for excess capacity = $12,000

Selling price of the fax machine per unit = $100

Unit-level costs:

Direct labor = $15

Direct materials = $40

Total cost per unit = $55

Special order = 2,000 units

Product-level costs= $50,000

Facility-level costs = $65,000

Total revenue from special order = $120,000 (2,000 * $60)

Total variable cost for special order = 110,000 (2,000 * $55)

Contribution margin from special order $10,000 (2,000 * $5)

Comparison with Rental fee $12,000 and $10,000