Nesbitt, Inc., manufactures display cases for retail stores. Good-4-U Foods, Inc., is a grocery chain that decided to expand into video rental and needs display cases. Good-

4-U Foods offered to purchase 14,000 display cases for \($35\) each. Normally, this type of case sells for \($45\), but Nesbitt is operating at 80 percent of capacity and wants to make the special order work. Nesbitt’s controller looked into the cost of the display cases using the following information from the activity-based accounting system:

Expansion of activity capacity for setups, inspection, and machining must be done in steps. For setups, each step provides an additional 25 hours of setup activity and is priced at the fixed activity rate. For inspection, activity capacity is expanded by 2,000 hours per year, and the cost is \($20,000\) per year (the salary for an additional inspector).
Machine capacity can be leased for a year at a rate of \($20\) per machine hour. Machine capacity must be acquired, however, in steps of 2,500 machine hours.
Required:
1. Compute the change in income for Nesbitt, Inc., if the order is accepted.
2. Suppose that the machining activity has 7,500 hours of unused capacity. How is the analysis affected?
3. Suppose that the setup activity has 80 hours of unused capacity and that the machining activity has 6,500 hours of unused capacity. How is the analysis affected?

Transcribed Image Text:

Activity Rate Activity Driver Unused Quantity Capacity Demanded Fixed Variable Direct materials Display cases 0 14,000 $20 Direct labor Direct labor hours 0 10,500 15 Setups Setup hours 60 80 $175 Inspection Inspection hours 800 400 10 Machining Machine hours 6,000 7,000 20 513 1 *This represents only the amount of resources demanded by the special order being considered. "This is expected activity cost divided by activity capacity.