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JL Company manufactures and sells a single product called a Widget Operating at capacity, the company can produce and sell 30,000 Rets per year. Costs associated with thislevel of producti on and sales are given below: Unit Total Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense $25$750,000 180,000 90,000 210,000 120,000 180,000 3 7 4 Total cost $51 $ 1,530,000 The Rets normally sell for $56 each. Fixed manufacturing overhead is constant at $210,000 per y ear within the range of 21,000 through 30,000 Rets per year Required 1. Assume that due to a recession, JL Company expects to sell only 21,000 Rets through regular channels next year. A large retail chain has offered to purchase 9,000 Rets if JL is willing to accept a 16% discount off the regular price. There would be no sales commissions on this order; thus, variable selling expenses would be slashed by 75%. However, JL Company would have to purchase a special machine to engrave the retail chain's name on the 9,000 units. This machine would cost $18,000. JL Company has no assurance that the retail chain will purch ase addition al units in the future. Determin e the impact on profits next year if this special order is accepted Net profi by 2. Refer to the original data. Assume again that JL Company expects to sell only 21,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 9,000 Rets. The Army would pay a fixed fee of $1.80 per Widget, and it would reimburse JL Comp any for all costs of production (variable and fixed) associated with the units Because the army would pick up the Rets with its own trucks, there would be no variable selling expenses associated with this order. If JL Company accepts the order, by how much will profits increase or decrease for the year? Net profit by 3. Assume the same situation as that described in (2) above, except that the company expects to sell 30,000 Rets through regular channels next y ear. Thus, accepting the U.S. Army's order would require giving up regular sales of 9,000 Rets. If the Army's order is accepted, by how much will profits increase or decrease from what they would be if the 9,000 Rets were sold through regular channels? Net profi by

Answer 1

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Particulars	Details	Amount	Price per unit
No. of units produced	30,000.00	30,000.00
Sell price per unit			55.00	A
Direct Material		750,000.00	25.00
Direct Labor		180,000.00	6.00
Variable Manufacturing overhead		90,000.00	3.00
Variable selling expense		120,000.00	4.00	C
Total Variable cost per unit			38.00
Contribution per unit			17.00	G
Fixed Manufacturing overhead		210,000.00	7.00
Fixed selling expense		180,000.00	6.00
Total Fixed cost per unit			13.00
Current Scenario
Units Sold	21,000.00
Contribution earned		357,000.00		21,000*17
Less:
Fixed Manufacturing overhead		210,000.00
Fixed selling expense		180,000.00
Net Profit		(33,000.00)
Situation 1- Offer of Retail Chain
Reduction in Sell price by	16%
Reduction in Sell price per unit	8.80			B=A*16%
Reduction in Variable selling expense	75%
Reduction in Variable selling expense	3.00			D=C*75%
Revised Sell price per unit		46.20		E=A-B
Less:
Direct Material		25.00
Direct Labor		6.00
Variable Manufacturing overhead		3.00
Variable selling expense		1.00		F=C-D
Total Variable cost per unit		35.00
Contribution per unit		11.20
No. of Units		9,000.00
Total Contribution		100,800.00
Less: Cost of special machine		18,000.00
Net income		82,800.00
Conclusion: By selling the remaining 9,000 units JL Company can earn an additional profit $ 82,800. So they should accept this project.
Note: Fixed manufacturing and selling expenses are sunk cost and they should not be considered for this order.
Situation 2- US Army
Fixed Fee per unit	1.80
Fixed manufacturing overhead per unit	7.00
Net received per unit	8.80
No. of Units	9,000.00		5000*8.8
Total received	79,200.00
Conclusion: By selling the remaining 9,000 units to US army JL Company can earn an additional profit $ 79,200. So they should accept this project.
Situation 3- US Army
Particulars		Sales through regular channel	Provincial Government
Units Sold		30,000.00	21,000.00	H
Contribution earned		510,000.00	357,000.00	I=H*G
Less:
Fixed Manufacturing overhead		210,000.00	210,000.00
Fixed selling expense		180,000.00	180,000.00
Net Income		120,000.00	(33,000.00)
Add: Total received from US Army			79,200.00	Calculated in Situation 2 above
Net Profit		120,000.00	46,200.00
Variance			73,800.00
Conclusion: If JL company is able to sell all its units through regular channel then it should not sell to US Army. Because it will earn $ 73,800 less if it will sell to US Army.