Question

4-54. Special Orders (QLO 4-1, © 2) Sherene Nili manages a company that produces wedding gowns. She produces both a custom product that is made to order and a standard product that is sold in bridal salons. Her accountant prepared the following forecasted income statement for March, which is a busy month. Custom Dresses Standard Dresses 10 20 $50,000 $30,000 $10,000 $ 8,000 20,000 9,000 600 4,200 2,800 1,000 600 Number of dresses Sales revenue Materials Labor Machine depreciation Rent Heat and light Other production costs Marketing and administration Total costs Operating profit 300 Total 30 $80,000 $18,000 29.000 900 7,000 1,600 2,800 7,700 $67,000 $13,000 Ms. Nili already has orders for the 10 custom dresses reflected in the March forecasted income statement. The depreciation charges are for machines used in the respective product lines. Machines depreciate at the rate of Si per hour based on hours used, so these are variable costs. In March, cutting and sewing machines are expected to operate for 900 hours, of which 600 hours will be used to make custom dresses. The rent is for the building space, which has been leased for several years at $7,000 per month. The rent, heat, and light are allocated to the product lines based on the amount of floor space occupied. A valued customer, who is a wedding consultant, has asked Ms. Nili for a special favor. This customer has a client who wants to get married in early April. Ms. Nili's company is working at capacity and would have to give up some other business to make this dress. She can't renege on custom orders already agreed to, but she can reduce the number of standard dresses produced in March to 10. Ms. Nili would lose permanently the opportunity to make up the lost production of standard dresses because she has no unused capacity for the foreseeable future. The customer is willing to pay $24,000 for the special order. Materials and labor for the order will cost $6,000 and $10.000, respectively. The special order would require 140 hours of machine time. Ms. Nili's company would save 150 hours of machine time from the standard dress business given up. Rent, heat and light, and other production costs would not be affected by the special order. Required a. Should Ms. Nilitake the order? Explain your answer. b. What is the minimum price Ms. Nili should accept to take the special order? c. What are the other factors, if any, besides price that she should consider?

Answer 1

20 DATE: / PAGE NO Solution & Calculation of Contribution per with for Standard Dresses &e for to units. - Sales Revernue $ 30,000 len Variable Cost : Materials & suo Labor in $. 9000 $17000 Contribution total 9 $ 1Bero units produced (3) Contribution per unit (C) = (9) +b)) $650 Contribution for lo units ($650 X 10) $650 i Profit Calculation of order (special) Price of order $ 24000 len Variable cost Material de Guainte labor loro $ 16ero $ souro Since, Machine, Reut, heat and light enpenn will remain the same, therefore, there expeury are not considered while calculating the profit som both the options. e. som standard dresses and from special order. As the contribution from special ordu is & soon wlich is leigher than the contributor margin from standand dresses, therefore, apr. Noli

should shandaccept the special order. (6) Calculation of minimum price. Mes Nili should accept to take the special order: Discct cost of special order? . Materials & bero lasor $10000 $ 16ooo Add a Contribution forgone of $ 6500 Stauetasel dresses - Loº Minimum price should be a $22520 (0) Other Paltors, besicles the price Ms. Nili should consider for accepting the special osder : Relationship withe enistung Customers' By taccepting special oreles, the Mo Nils will not be able to fulfil the existing maeker drequirements, that may lead to haupe the relationship with enisting castoners. loss of market share & Due to non metting the requirement, the market share a enisting product of mo. Nil may lose.

ir loss in long beun : due to now availabily of produet anisting, the customer nay Sheft permanently to other rendon will lead to long run losses. Loss of Goodwill & celiability in product & (v