Short-Run Decision Making

Currently, Orrin Company makes 40,000 units of a product annually with the following unit manufacturing costs:

Direct materials	$4.00
Direct labor	1.20
Variable overhead	2.40
Fixed overhead	3.50
Total unit cost	$11.10

Orrin Company prices its product at $15 per unit and is selling all it can produce. Recently, Orrin received an offer from Kane Company to buy 5,000 units of the product at $12.50 per unit.

1.

From the list below, check all the relevant costs and benefits Orrin must consider in determining whether or not to accept the order from Kane Company.

(Select "Yes" for the items that are applicable and "No" for the items that do not apply)

$15.00	- Select your answer -YesNoItem 1
$11.10	- Select your answer -YesNoItem 2
$3.90	- Select your answer -YesNoItem 3
$1.40	- Select your answer -YesNoItem 4
$12.50	- Select your answer -YesNoItem 5
$7.60	- Select your answer -YesNoItem 6
$4.90	- Select your answer -YesNoItem 7

2.	If Orrin accepts Kane's order, the impact on operating income for the year will be a(n) (Round your intermediate unit costs to the nearest cent. Use the rounded computations in subsequent requirements, if required.) - Select your answer -decrease by $12,500increase by $12,500increase by $7,000decrease by $7,000be the sameItem 8 .
3.	What is the lowest price Orrin could accept on the special order that would leave it as well off as not accepting the order? - Select your answer -$11.10 per unit$7.60 per unit$12.50 per unit$15.00 per unitItem 9

Use the Interactive Graph to answer the following questions:

4.

Now assume that Orrin is currently making and selling 30,000 units (capacity is still 40,000 units). If Orrin accepts Kane's order, the impact on operating income for the year will be a(n) - Select your answer -decrease by $12,500increase by $12,500increase by $24,500decrease by $24,500be the sameItem 10 . What is the lowest price Orrin could accept on the special order that would leave it as well off as not accepting the order? - Select your answer -$11.10 per unit$7.60 per unit$12.50 per unit$15.00 per unit

5.

Assume that Orrin is currently making and selling 30,000 units (capacity is still 40,000 units). Kane offers $12.50 per unit, but requires that Orrin brand each unit with Kane's logo. This will raise direct materials cost to $4.15 per unit and cost Orrin $6,000 to rent special stamping machinery for the year. If Orrin accepts Kane's order, the impact on operating income for the year will be a(n) - Select your answer -decrease by $12,500increase by $12,500increase by $23,750decrease by $23,750decrease by $17,750increase by $17,750be the sameItem 12 . What is the lowest price Orrin could accept on the special order that would leave it as well off as not accepting the order? - Select your answer -$11.10 per unit$7.60 per unit$7.75 per unit$8.95 per unit$12.50 per unit$15.00 per unitItem 13

Continue to vary the purchase price, the cost of manufacturing, and the cost of machine rental to see the impact on operating income if Orrin accepts the order.

$15 Special offer price 512.50 Direct materials 4.15 Direct labor $1.2 new var cost Variable overhead 52.4 S7.60 S7.75 Fixed overhead $3.50 Total unit cost S11.10 Units capacity per year 40000 Units to sell wio order Units in order 5000 Total fixed overhead $140,000.00 Increased machinery lease 150 )| s1.2 s8.95 8,000 S1.2 S8.95 Impact of purchase at capacity $12,500.00 ncrease