Score: 30/30 Points 100 %

Problem 14-45 Special Order; Financial and Production Considerations (LO 14-4, 14-5)

[The following information applies to the questions displayed below.]

 
Jupiter Corporation manufactures skateboards. Several weeks ago, the firm received a special-order inquiry from Venus, Inc. Venus desires
to market a skateboard similar to one of Jupiter’s and has offered to purchase 11,000 units if the order can be completed in three months.
The cost data for Jupiter’s model no. 43 skateboard follow.
 
       
Direct material $ 8.20 
Direct labor: 0.25 hours at $9.00   2.25 
Total manufacturing overhead:     
0.5 hours at $20   10.00 
Total $20.45 

Additional data:
The normal selling price of model no. 43 is $26.50; however, Venus has offered Jupiter only $15.75 because of the large quantity it is
willing to purchase.
Venus requires a modification of the design that will allow a $2.10 reduction in direct-material cost.
Jupiter’s production supervisor notes that the company will incur $3,700 in additional setup costs and will have to purchase a $2,400
special device to manufacture these units. The device will be discarded once the special order is completed.
Total manufacturing overhead costs are applied to production at the rate of $20 per machine hour. This figure is based, in part, on
budgeted yearly fixed overhead of $750,000 and planned production activity of 60,000 machine hours (5,000 per month).
Jupiter will allocate $1,800 of existing fixed administrative costs to the order as “... part of the cost of doing business.”

References

Section Break Problem 14-45 Special Order;

Financial and Production
Considerations (LO 14-4, 14-5)
  
3. Award: 5 out of 5.00 points  

Problem 14-45 Part 1

Required:
1-a. Calculate the net profit increase or (decrease) from accepting the special order.
1-b. Assume that present sales will not be affected. Should the order be accepted from a financial point of view (i.e., is it profitable)?

Complete this question by entering your answers in the tabs below.

Req 1A Req 1B

Calculate the net profit increase or (decrease) from accepting the special order. (Do not round intermediate calculations.)

Increase (decrease) to
$ 34,050 
profit

 Req 1A Req 1B 

References

Worksheet Difficulty: 2 Medium Learning Objective: 14-05 Prepare analyses of various

special decisions, properly identifying the relevant costs
and benefits.

Problem 14-45 Part 1 Learning Objective: 14-04

Identify relevant costs and
benefits, giving proper
treatment to sunk costs,
opportunity costs, and unit
costs.

Problem 14-45 Part 1

Required:
1-a. Calculate the net profit increase or (decrease) from accepting the special order.
1-b. Assume that present sales will not be affected. Should the order be accepted from a financial point of view (i.e., is it profitable)?
 Complete this question by entering your answers in the tabs below.

Req 1A Req 1B

Calculate the net profit increase or (decrease) from accepting the special order. (Do not round intermediate calculations.)

Increase (decrease) to profit $ 34,050

 Req 1A Req 1B 

 
Explanation:

1-a.
Yes, the order should be accepted because it generates a profit of $34,050 for the firm. Note: The fixed administrative cost is irrelevant
to the decision, because this cost will be incurred regardless of whether Jupiter accepts or rejects the order.

Selling price $ 15.75

Less: Direct material ($8.20 – $2.10) $ 6.10
Direct labor 2.25
Variable manufacturing overhead (0.5 hours × $7.50*) 3.75 12.10
Unit contribution margin $ 3.65
Total contribution margin (11,000 units × $3.65) $40,150
Less: Additional setup costs $3,700
Special device 2,400 6,100
Net contribution to profit $34,050

*Fixed manufacturing overhead: $750,000 ÷ 60,000 machine hours = $12.50 per hour
Variable manufacturing overhead: $20.00 – $12.50 = $7.50