Question
This is a special order problem that deals with a service rather than a product. But the concepts for determining the profit from the special
This is a special order problem that deals with a service rather than a product. But the concepts for determining the profit from the special order remain the same. And the ultimate question still is: Should the special offer from this customer be accepted or not? For guidance, use the example in the Special Order lecture and the special order study problems. As with almost all of the analyses that we have done, determining what costs are variable and what costs are fixed is a critical part of the analysis. ______________________________________________________
Preston Concrete is a major supplier of concrete to residential and commercial builders in the Pacific Northwest. The company's general pricing policy is to set prices at $113 per cubic yard. Deliveries for 2015 were 380,000 cubic yards. Total costs were:
Material costs | $21,356,000 |
Yard operation costs | $5,320,000 |
Administrative costs | $1,596,000 |
25% of the estimated yard operation costs were fixed, and all of the administrative costs were fixed. In addition to the costs above, estimated fixed delivery costs were $205,000 for the year, and estimated variable delivery costs were $8.00 per mile and $41.50 per truck hour. The rate per mile reflects the fact that more miles result in more gas, oil, and maintenance. The rate per truck hour reflects the fact that trucks that are waiting at a jobsite are kept running (so the concrete mix won't solidify), and drivers continue to get paid during that time.
Near the end of 2015, Fairview Construction Company asked for a delivery of 5,100 cubic yards of concrete but was unwilling to pay the regular price; it was only willing to pay $81 per cubic yard. Preston estimated that the job would require 6,700 miles of driving and 290 truck hours. The housing market in the Pacific Northwest had slowed during recent months, leaving Preston with enough capacity to fill the order, but its sales manager was reluctant to commit to such a reduced price.
REQUIRED If Preston accepted the offer, what would the profit or loss have been (enter a loss as a negative number)?
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