(5 Questions, 10 Marks)

Demilo Ltd. produces jewelry boxes for retail customers such as Walmart. One of their most popular products has the following selling price and costs:

Description Dollar value per unit

Selling price $45.00

Direct materials $9.00

Direct labour $8.10

Variable overhead $7.20

Fixed overhead $6.30

Sales commission $2.25

Income per unit $12.15

The company, due to the impact of a world-wide pandemic, is not at capacity. They also have some non-manufacturing fixed costs (such as sales and administration costs). They have provided the following details:

Capacity (units): 20,000

Production (units): 16,000

Fixed non-manufacturing costs (annual): $48,600

Cooper Ltd., who has not bought from Demilo Ltd. before, has offered to buy jewelry boxes for a special event that Cooper is managing. Cooper Ltd. is from a geographic region outside the area normally serviced by Demilo Ltd. Cooper Ltd. has agreed to pay the transportation costs. In addition, because no sales person was involved, there will be no sales commission paid on this sale.

Other details of Cooper's offer are as follows:

Total units required: 3,000

Purchase price per unit: $28.00

Transportation costs / unit: $1.20

Use the above information to answer the following questions.

Question 5(1 point)

If Demilo Ltd. accepts this order, will operating income increase, decrease or stay the same?

Question 5 options:

a)

Decrease

b)

Increase

c)

Stay the same

Question 6(3 points)

By how much will operating income change if the order is accepted?

Enter your answer as a positive number.

Question 7(1 point)

Assume, INSTEAD, that the order from Cooper Ltd. was obtained through a sales person so sales commission has to be paid. In addition, Cooper Ltd. has asked Demilo Ltd. to pay all transportation costs.

Given this new information, will Demilo's operating income increase, decrease or stay the same?

a)

Stay the same

b)

Decrease

c)

Increase

Question 8(2 points)

Given this new information, by how much will operating income change if the order was accepted now?

Enter your answer as a positive number.

Question 9(3 points)

What qualitative factors support accepting the order from Cooper Ltd.?

Choose all that apply.

Question 9 options:

a)

May have a negative impact on regular business.

b)

Improve employee moral.

c)

Increase the company's brand awareness in the current geographical region.

d)

Reduce need to lay off employees.

e)

Reduction in idle capacity.