PROBLEM 2 Accepting a Special Order

The Wild Orchid Corporation is working at full production capacity producing 13,000 units of a unique product, Everlast. The projected contribution format income statement for next month (based on full production capacity) is as follows:

Sales $676,000

Variable CGS $260,000

Variable SG&A $ 52,000

Contribution margin $364,000

FMOH $ 78,000

FSG&A $ 0

Net Operating Income $286,000

A customer, the Apex Company, has asked Wild Orchid to produce 3,500 units of Stronglast, a modification of Everlast. Stronglast would require the same manufacturing processes as Everlast. Apex has offered to pay Wild Orchid $40 for a unit of Stronglast and share half of the SG&A cost per unit.

A. Calculate the opportunity cost to Wild Orchid of producing the 3,500 units of Stronglast.

B. The Chesapeake Corporation has offered to produce 3,500 units of Everlast for Wild Orchid so that Wild Orchid may accept the Apex offer. That is, if Wild Orchid accepts the Chesapeake offer, Wild Orchid would manufacture 9,500 units of Everlast and 3,500 units of Stronglast and purchase 3,500 units of Everlast from Chesapeake. Chesapeake would charge Wild Orchid $36 per unit to manufacture Everlast. If Wild Orchid decides to accept the Chesapeake offer, by how much would Wild Orchid expect NOI to change (dont forget to indicate if this change is an increase or a decrease to NOI).