Question

Alpine Luggage has a capacity to produce 440,000 suitcases per year. The company is currently producing and selling 360,000 units per year at a selling price of $401 per case. The cost of producing and selling one case follows:

Variable manufacturing costs $ 165
Fixed manufacturing costs 38
Variable selling and administrative costs 80
Fixed selling and administrative costs 19
Total costs $ 302
The company has received a special order for 20,000 suitcases at a price of $251 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 $49 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 $ 251
Variable manufacturing costs 165
Fixed manufacturing costs 38
Variable selling and administrative costs 49
Fixed selling and administrative costs 19
Net profit (loss) per case $ (20)
Required:
a. What is the impact on profit for the year if Alpine accepts the special order? (Enter your answers in thousands of dollars. Select option "higher" or "lower", keeping Status Quo as the base. Select "none" if there is no effect.)
b. Do you agree with the decision to reject the special order?
Yes
No

Answer 1

Part a

The Result shows an Increase in Net Profit by $740,000.

Part b

No, I do no agree with the decision to reject the special order. Because calculations have included Fixed Costs which are irrelevant for this decision.

Step-by-step explanation:

When deciding on accepting a Special Offer, consider only the relevant items. That is Costs and Revenues that would change as a result of the decision.

In this case All Fixed costs would remain the same as there is still capacity to take this special order and also that they are already incurred.

Analysis of Accepting the Special Order

Sales ($251 x 20,000) $5,020,000

Less Variable Costs :

Variable manufacturing costs ($165 x 20,000) ($3,300,000)

Variable selling and administrative costs ($49 x 20,000) ($980,000)

Net Profit (Loss) $740,000

Conclusion

The Result shows an Increase in Net Profit by $740,000.