Mission Electronics manufactures and sells basic DVD players for sale under various generic store brand names. The cost of one of their models follows:
|Fixed overhead ($3,705,100 per year; 469,000 units per year)||7.90|
Pacific Cash & Carry, a chain of low-price electronic sales and rental outlets, has asked Mission to supply them with 38,000 players for a special promotion Pacific is planning. Pacific has offered to pay Mission a unit price of $54 per DVD player. The regular selling price is $79. The special order would require some modification to the basic model. These modifications would add $5.90 per unit in material cost, $3.40 per unit in labor cost, and $2.40 in variable overhead cost. Although Mission has the capacity to produce 38,000 units without affecting its regular production of 469,000 units, a one-time rental of special testing equipment to meet Pacific's requirements would be needed. The equipment rental would be $68,800 and would allow Mission to test up to 69,000 units.
a. Prepare a schedule to show the impact of filling the Pacific order on Mission's profits for the year.
|Status Quo 469,000 Units||Alternative 507,000 Units||Difference|
|Less variable costs|
|Total variable cost|
|Less fixed costs Operating profit(loss)|
b. From an operating profit perspective for the current year, should Mission accept the order?
c. What is the minimum quantity of DVD players in the special order that would make it profitable?
Identifying Relevant Costs in Accepting an Order:
The relevant costs of a special order are the costs that will increase when the order is accepted, that is only the differential costs. These usually include the variable manufacturing cost and only fixed costs that will increase if the order is accepted.
Answer and Explanation: 1
a.) The impact the order will have is:
|per unit||Status Quo 469,000 Units||Alternative 507,000 Units||Difference|
|Sales Revenue||$79 x 469,000 units |
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fromChapter 9 / Lesson 8
As orders sometimes come with increased costs, it is important to identify all relevant costs before accepting a given order. Learn the types of special orders, and the considerations for three types of cost: relevant, variable, and fixed costs.