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Special-Order Decision Rianne Company produces a light fixture with the following unit cost: Direct materials $2 Direct labour 1 Variable overhead 3 Fixed overhead Unit cost $8 The production capacity is 300,000 units per year. Because of a depressed housing market, the company expects to produce only 180,000 fixtures for the coming year. The company also has fixed selling costs totalling $500,000 per year and variable selling costs of $1 per unit sold. The fixtures normally sell for $12 each. At the beginning of the year, a customer from a geographic region outside the area normally served by the company offered to buy 100,000 fixtures for $7 each. The customer also offered to pay all transportation costs. Since there would be no sales commissions involved, this order would not have any variable selling costs. Required: 1. Conceptual Connection: Based on a quantitative (numerical) analysis, should the company accept the order? Yes v , the quantitative analysis is $ 700,000 X in favour of accepting v the special order. 2. Conceptual Connection: What qualitative factors might impact the decision? Assume that no other orders are expected beyond the regular business and the special order.Make-or-Buy Decision Zion Manufacturing had always made its components inl1ouse. However, Bryoe Component works had recently offered to supply one component, K2, at a price of $25 each. Zion uses 10,000 units of component K2 each year. The cost per unit of this component is as follows: Direct materials $12.00 Direct labour 3.25 Variable overhead 3.50 Fixed overhead 2 00 Total $25.75 Assume that 75 percent of Zion Manufacturing's xed overhead for component K2 would be eliminated if that component were no longer produced. Required: 1. Conceptual Connection: If Zion decides to purchase the component from Bryce, by how much will operating income increase or decrease? , x Which alternative IS better? Purchase the component lrom Bryce ./ Keep or Drop AudioMart is a retailer of radios, stereos, and televisions. The store carries two portable sound systems that have radios, CD players, and speakers. system A, of slightly higher quality than system B, costs $20 more. With rare exceptions, the store also sells a headset when a system is sold. The headset can be used with either system. Variable-costing income statements for the three products follow: System A System B Headset Sales $45,000 $32,500 $8,000 Less: Variable expenses 20,000 25,500 3,200 Contribution margin 25,000 7,000 4,800 Less: Fixed costs* 10,000 18,000 2,700 Operating income $15,000 $(11,000) $2,100 *This includes common fixed costs totalling $18,000, allocated to each product in proportion to its revenues. The owner of the store is concerned about the profit performance of system B and is considering dropping it. If the product is dropped, sales of system A will increase by 30 percent, and sales of headsets will drop by 25 percent. (Note: Round all answers to the nearest whole number. ) Required: 1. Prepare segmented income statements for the three products. Round your answers to the nearest dollar. Use a minus sign to enter negative values. AudioMart Segmented Income Statement System A System B Headset Total Sales $ 45,000 $ 32,500 8,000 $ 85,500 Variable expenses 20,000 25,500 3,200 48,700 Contribution margin 25,000 7,000 4,800 36,800 Direct fixed cost 18,000 X 2,700 X Segment margin 15,000 X $ -11,000 2,100 X Common fixed cost 18,000 Operating income2. Conceptual Connection: Prepare segmented income statements for system A and the headsets assuming that system B is dropped. Round your answers to the nearest dollar. Use a minus sign to enter negative values. AudioMart Segmented Income Statement System A Headset Total Sales 58,500 6,000 64,500 Variable expenses 26,000 2,400 28,400 Contribution margin 32,500 3,600 36,100 Direct fixed costs Segment margin Common fixed costs 18,000 Operating income Feedback Check My Work Should system B be dropped? Yes V Feedback Check My Work 3. Conceptual Connection: Suppose that a third system, system C, with a similar quality to system B, could be acquired. Assume that with C the sales of A would remain unchanged; however, C would produce only 80 percent of the revenues of B, and sales of the headsets would drop by 10 percent. The contribution margin ratio of C is 50 percent, and its direct fixed costs would be identical to those of B. AudioMart Segmented Income Statement System A System C Headset Total Sales Variable expenses Contribution margin Direct fixed cost Segment margin Common fixed cost Operating income