Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Sherene Nili manages a company that produces wedding gowns. She produces both a custom product that is made to order and a standard product that

Sherene Nili manages a company that produces wedding gowns. She produces both a custom product that is made to order and a standard product that is sold in bridal salons. Her accountant prepared the following forecasted income statement for March, which is a busy month:

Custom Dresses Standard Dresses Total
Number of dresses 10 20 30
Sales revenue $ 45,500 $ 25,500 $ 71,000
Materials $ 9,100 $ 7,100 $ 16,200
Labor 19,100 8,100 27,200
Machine depreciation 510 210 720
Rent 3,300 1,900 5,200
Heat and light 1,100 700 1,800
Other production costs 1,900
Marketing and administration 6,800
Total costs $ 59,820
Operating profit $ 11,180

Ms. Nili already has orders for the 10 custom dresses reflected in the March forecasted income statement. The depreciation charges are for machines used in the respective product lines. Machines depreciate at the rate of $1 per hour based on hours used, so these are variable costs. In March, cutting and sewing machines are expected to operate for 720 hours, of which 510 hours will be used to make custom dresses. The rent is for the building space, which has been leased for several years at $5,200 per month. The rent, heat, and light are allocated to the product lines based on the amount of floor space occupied.

A valued customer, who is a wedding consultant, has asked Ms. Nili for a special favor. This customer has a client who wants to get married in early April. Ms. Nili's company is working at capacity and would have to give up some other business to make this dress. She can't renege on custom orders already agreed to, but she can reduce the number of standard dresses produced in March to 10. Ms. Nili would lose permanently the opportunity to make up the lost production of standard dresses because she has no unused capacity for the foreseeable future. The customer is willing to pay $21,700 for the special order. Materials and labor for the order will cost $5,100 and $9,100, respectively. The special order would require 95 hours of machine time. Ms. Nili's company would save 105 hours of machine time from the standard dress business given up. Rent, heat and light, and other production costs would not be affected by the special order.

Required:

a-1. Calculate the differential operating profit (loss).

a-2. From an operating profit (loss) perspective for March, should Ms. Nili accept the order?

b. What is the minimum price Ms. Nili should accept to take the special order?

alculate the differential operating profit (loss). (Select option "increase" or "decrease", keeping Without special order as the base. Select "none" if there is no effect.)

Without Special Order With Special Order Impact
Revenue $71,000 increase
Materials 16,200 increase
Labor 27,200 increase
Machine depreciation 720 decrease
Contribution margin increase
Rent 5,200 5,200 none
Heat and light 1,800 1,800 none
Other production costs 1,900 1,900 none
Marketing and administration 6,800 6,800 none
Operating profit (loss) increase

Need to Calculate Operating profit loss at bottom, Revenue, Materials,Contribution Margin, Impact(which is how much more or less is of the without the special order which I have labeled correctly as increase or decrease or none)

What should be the minimum price Ms Nili should accept to take the special order?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Principles Of Auditing And Other Assurance Services

Authors: Ray Whittington, Kurt Pany

16th Edition

007352686X, 978-0073526867

More Books

Students also viewed these Accounting questions

Question

Define relevance feedback.

Answered: 1 week ago