Problem # 1

Blowing Sand Company has just received a one-time offer to produce 10,000 units of its Gusty model fan for a price of $22 each. The Gusty model costs $26 to produce ($17 in variable costs and $9 of fixed overhead). Because the offer came during a slow production month, Blowing Sand has enough excess capacity to accept the order.

1.

Should Blowing Sand accept the special order?

	Yes
	No

2. Calculate the increase or decrease in short-term profit from accepting the special order.

Profit

Increases or decreases

By

Problem # 2

Blowing Sand Company produces the Drafty model fan, which currently has a net loss of $43,000 as follows:

	Drafty Model
Sales revenue	$	150,000
Less: Variable costs		125,000
Contribution margin	$	25,000
Less: Direct fixed costs		18,000
Segment margin	$	7,000
Less: Common fixed costs		50,000
Net operating income (loss)	$	(43,000)

Eliminating the Drafty product line would eliminate $18,000 of direct fixed costs. The $50,000 of common fixed costs would be redistributed to Blowing Sands remaining product lines.

Will Blowing Sands net operating income increase or decrease if the Drafty model is eliminated? By how much?

Total Profit

Increases or Decreases

By

Problem # 3

Blowing Sand Company also has the Blast fan model. It is the companys top-selling model with sales of 30,000 units per year. This model has a dual fan as well as a thermostat component that causes the fan to cycle on and off depending on the room temperature. Blowing Sand has always manufactured the thermostat component but is considering buying the part from a supplier.

It costs Blowing Sand $5 to make each thermostat ($2.50 variable and $2.50 fixed). Flurry Co. has offered to sell the component to Blowing Sand for $4. Blowing Sands decision to purchase the part from Flurry would eliminate all variable costs but none of the fixed costs. Blowing Sand has no other possible uses for the area currently dedicated to the thermostat production.

Calculate the effect on Blowing Sand total costs if the thermostat is purchased from Flurry Co.

The Toal Cost

Decreases or Increases

By